Commodity Corner Extra
So, what are the issues that have been going on with the platinum miners in South Africa and what implications does it have for platinum? Cast your mind back to last year when platinum was in the news for all the wrong reasons. On the 10th August 2012, 3000 miners had a wildcat strike at the Marikana mine not far from Johannesburg which is owned by London listed producer Lonmin. Workers at the mines were frustrated by the high profits of the mining companies in contrast with their low wages (not surprisingly). Workers were, in effect, demanding a tripling of their wages from approx. $500 per month to $1500 per month. On the 16th August, the SA security forces at the mine opened fire on the miners, killing 34 miners and injuring a further 78. The labour unrest appears to be a problem that is endemic in the platinum mines in the region. In October 2012, Anglo American (Amplats), who mine platinum in the Rustenburg region just like Lonmin and, as a company, accounts for some 38% of world supply, fired 12,967 striking miners. They went on to announce in January this year that they planned to cut production of platinum by some 400,000 oz, or 7% of global supply. We contacted one industry watcher who has a very good grasp of current affairs. Here’s his response to what is happening in the platinum market and the current mining situation: “On the platinum front, things are pretty bad and unlikely to get better any time soon. The main issue is that the main mining companies are caught (excuse the pun) between a rock and a hard place. At one end, global platinum demand is sagging, while at the other, costs, especially labour costs, are rising.
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While demand may increase as the global economy starts to improve, this won’t happen for a while and the labour issue will likely drag and drag. Mining is a very political industry in South Africa and Zimbabwe where most platinum mines are; and as the ruling parties in those countries face re-election, they will use the mines as a proxy to rouse popular sentiment. As a result, they will be indifferent to what the mining firms are telling them about the need to streamline their operations, while pretending to be on the side of the miners. So, basically, not a great time to be involved in platinum.” We think the political dynamics are open to interpretation, but, in a nut shell, it would appear that margins for the mining companies are being squeezed and demand remains muted. Counterbalancing this, however, is the sharp forward reduction in supply given the closing of quite a degree of mine capacity. The miners’ strikes have resulted in a material decrease in supply (Amplats announced that supply was down 2% this quarter due to the strikes) and so this will help buoy prices somewhat. The mining companies will keep cutting production if prices get much softer and if there is a re-flaring of unrest, this could cut production further. What is apparent is that platinum prices are likely to be volatile whilst there are constant threats to supply. From a fundamental point of view, favour would be for a further modest softening of platinum prices, but any other strikes again could cause violent movements. Elections coming up in South Africa in 2014 mean that the platinum mines will most likely be used as a political football. Any move back towards the $1280/1320/oz is likely to be a good opportunity to get long.