JOHANNESBURG - The South African platinum group metals (PGM) industry is in big trouble and poses significant risks not only to the economy but also on the socio-political front.
The cost curve of identified individual PGM mines constructed from reports of various listed companies indicates that more than 800000 ounces or 18% of total South African platinum production are currently produced at a loss if Anglo American Platinum’s production mix of platinum, rhodium and palladium is taken into account in the calculation of the net PGM income per ounce of platinum produced.
Another 600 000 ounces are produced at or near break-even levels.
The cost curve of the individual mines also points that the loss-making operations currently employ more than 48000 permanent workers and contractors, while mines operating at or near break-even levels employ more than 32000.
That is more than 28% and 19% of the total employment in the South African PGM industry respectively and 47% in total. Worst of all, the loss making operations account for 11% of the total workforce in the mining industry.
Earlier this month Impala Platinum announced that its mining operations in Rustenburg are considering restructuring measures that may affect 2500 people. The effects of job losses as a result of rationalisation, cost cutting and the closure of mines are significant.
According to the South African Chamber of Mines, every employee in the gold sector supports between 5 and 10 other dependants and this can be assumed to be the same in the PGM sector.
The chamber also estimates that every direct job in the mining sector results in two indirect jobs being created elsewhere in the economy.
If, for argument sake, 35000 workers are retrenched as a result of restructuring, optimisation and the closure of loss making PGM operations it could result in 210000 to 385000 people going hungry while unemployment in the economy will swell by more than 100000.
In 2016 the median monthly earnings of employees in the mining industry was R7500 a month. A loss of 35000 jobs will, therefore, mean that the economies of the communities will directly shrink by more than R3billion annually and much more indirectly.
The impact of restructuring, optimisation and closure of PGM operations on the total economy is significant. It is estimated that platinum mining operations in South Africa contributed approximately 2.2% to the country’s GDP in nominal terms in 2016.
The closure of the loss making operations, which may result in the loss of production of up to 800 000 ounces will shave off more than R17bn from South Africa’s GDP or more than 0.4percent in 2016 terms. The impact on the economy will be further exacerbated by the possible closure of gold mines producing 20 or more tons of gold to the value of R11bn annually and which could result in the loss of 19000 jobs.
Nearly 50% of South Africa’s PGM production is now marginal, meaning that adverse price movements or cost pressures could result in a major impact on the lives of mines and employment.
Employment cost in the PGM industry accounted for approximately 47% of the industry’s revenue in 2016. The estimated employment and production curves against the operating costs indicate that there is little leeway for excessive wage increases.
The layoffs and the devastating financial effects on communities are likely to create havoc as civil unrest will be of the order of the day. Yes, the rand will fall out of bed and boost the rand prices of gold and platinum but it will be too late to save the industries, though. The socio-political chaos is unthinkable.
Ryk de Klerk was co-founder of PlexCrown Fund Ratings and is a consultant for the company.