/ 12 July 2012

Will platinum pull through?

Platinum producers are responsible for the glut in the market because of an oversupply
Platinum producers are responsible for the glut in the market because of an oversupply

Platinum is one of the rarest and most precious metals and 80% of global reserves are underneath South African soil. It is a critical asset for the country, but low prices and rising costs have analysts, investors and the government wondering whether platinum, the world's second-heaviest metal, is in terminal decline.

Commodity prices are dropping, there is a surplus on the global market, production is slowing and the costs associated with mining, such as labour, electricity and consumables, are rising. Mining is taking place at increasingly deeper levels, incurring higher costs and associated work stoppages. A growing recycling industry, which now meets 25% of all platinum needs, or 44% of vehicle catalyst requirements, is also a challenge.

But optimists say when the shares are down, buy them, because platinum company revenues are climbing and demand will rise soon.

It is said that South Africa's platinum mines have done too good a job in meeting demand. They are responsible for 75% of the global output and therefore also chiefly to blame for a glut in the market.

Data on the global supply and demand for platinum provided by chemicals and precious metals company Johnson Matthey show that, in 2011, there was an oversupply of 430 000 ounces in an eight million ounce a year market.

"We're our own worst enemy," said Peter Major, a mining analyst and consultant for Cadiz corporate solutions.

Metals consultancy Thomson Reuters GFMS estimates that the platinum market will be oversupplied by 735 000 ounces this year, although Johnson Matthey predicts it will be closer to last year's 430 000 ounces. But judging by the years before that, such as the 635 000 ounces in 2009, 355 000 in 2006 and 325 000 in 1993, oversupply is nothing new in this sector.

Despite the rising input costs, revenues are still climbing and, it is hoped, incoming emission regulations in many countries could see demand rise. But it is a declining commodity price that is really making the market sweat.

Platinum, averaging about $1 460 an ounce this month, was overtaken by the gold price in June last year and investors and traders are losing faith in the once star-performing commodity because prices are not high enough to make financial sense of operating platinum-producing mines. They are cutting back on operations and already two major ones have shut down this year.

Major said that, until now, platinum bullion in South Africa had been a reliable investment. But although South Africa's platinum index earnings had grown 18% a year since 1996, it had not budged since 2002. Inflationary pressures are perhaps the biggest problem though. "The rand platinum price is not matching South Africa's inflation, let alone mining cost inflation," Major said. "That's why the platinum industry is in such a predicament now."

Internal ination
In its 2011 annual report Anglo Platinum, the world's largest platinum producer, reported that cash operating cost per equivalent refined platinum ounce had increased by 16% because of lower production and increases in the cost of electricity, labour and consumables, which materially exceeded the escalation in the mining producer price index of 14%.

Impala Platinum, the second-largest producer of the metal, also noted the economic impact in its 2011 financials. "Internal ination at 7% was driven by significant increases in labour, consumables, explosives, fuel and underground support costs. The strength of the rand continues to have an adverse effect on South African-sourced inputs. Impala Platinum's operating expenses increased by almost 22% in 2011."

Impala was plagued by strikes and protracted wage negotiations of late and wages in the platinum sector had increased 12% a year for 12 years, but productivity had not increased, Major said.  

René Hochreiter, director of Sable Platinum and financial corporate advisory company Allan Hochreiter, agreed. "Labour cost to productivity cost in South Africa's platinum industry is probably the worst in the world."

Productivity is also dwindling. Centares per panel man per month (how much rock is mined per man) dropped from 32.8 to 29.6 for Implats. Anglo Platinum also experienced a 10% decrease in labour ­productivity, but it said that was attributable to 81 safety stoppages in 2011 – productivity had actually increased by 23% between 2008 and 2010.

But, Hochreiter said, in general the past 10 years had seen a 25% decrease in labour productivity in these two operations. One reason for this was the prevalence of HIV/Aids at the mines. According to the Chamber of Mines, the average infection rate in the industry was estimated to be between 25% and 30%.

"It's such a big problem but completely underreported," Hochreiter said. It resulted in greater absenteeism and lower productivity, which was reflected on the balance sheet.

"The high prevalence of HIV-related TB [tuberculosis] and the onset of Aids inuenced productivity negatively as a result of lost shifts due to illness and recruitment of new employees who require training," Impala stated in its 2011 annual report.

Productivity
It is often assumed that mechanisation cuts labour costs and increases productivity. But this week Lonmin, the world's third-largest platinum producer, said it would revert to conventional mining methods because mechanisation introduced in 2004 had failed to improve productivity.

PwC, in a review on mining trends in South Africa, said the dip in prices could be temporary: "Platinum suffered from pessimistic global views and improved production. We believe the significant decline in United States dollar platinum prices might be a short-term overreaction."

Platinum outperformed all other commodities in 2011, with a total 27% increase in revenue, the PwC review found. But "with the decline in platinum group metal prices since June 2011, coal could again be vying for the top spot in 2012".

Recycling also plays a role in the low demand. Johnson Matthey's figures show 6.48-million ounces of platinum were produced in 2011, but more than two-million ounces were recycled that year. According to the International Platinum Group Metals Association, with highly efficient recycling techniques more than 96% of platinum group metals are recovered.

But, Hochreiter said, recycling should not be viewed as a threat to the industry because the recycling figure had remained at 44% of the auto catalyst sector's total demand for more than 10 years.

Substituted
Of the total global platinum demand, 40% is used in auto catalysts, or catalytic converters, which render emissions from cars more benign, converting poisonous gases to less harmful ones. The converter's main component is a ceramic honeycomb coated with platinum and ­rhodium to which palladium is sometimes added.

But if there is one thing going for it, platinum cannot be substituted.

Palladium is used as a replacement in some cases. Although it is about 60% cheaper, at about $580 an ounce this week, double the amount has to be used with a petrol engine to have the same effect as platinum.

But, Hochreiter said, Russia, the world's biggest producer of palladium, was quickly running out of reserves and the price was expected to rise as a result. "Hence, when ­palladium reaches half the price of platinum, it will no longer be a viable economic substitute," he said.

Demand will soon be on the rise because new regulations in several vehicle-producing countries require a reduction in emissions.

"Virtually all countries in the world have mandatory and legislated emissions standards, which get tighter and tighter every year, and which mean that all cars have to have catalytic converters. In Europe, Euro 6 standards are coming in in 2014; in China, China 4 in 2013; in India, Bharat 5 in 2012; in the US, Tier 3; and California LEV3 standards in 2022 – and this will by no means be the end of emissions standards tightening more and more.

"This is the time to invest, when everyone is nay-saying. Platinum is the future of South Africa. The world is not going to slow down forever."

It was worth looking at the metal's track record, Hochreiter added. "The platinum index has been one of the best performing indices in the history of the JSE until recently. It was the first index to go over 100 000 and so the JSE had to cut three zeros off it so that it could be accommodated in its systems. Today it sits at 48.

"Since 1990, there have been four years of large [more than 300000 ounces a year] surpluses; the rest have been shortages. It is not a bad record and also not an indicator that the platinum industry is now in terminal decline."

Metal the backbone of state's mineral plan
The government is making serious moves towards securing the future of what it hopes will be a thriving mineral resources industry carried on the back of platinum production.

Earlier this year Mineral Resources Minister Susan Shabangu was given an internal report on the state of South Africa's platinum industry.

What is detailed in the report "is not for public consumption", the department told the Mail & Guardian. However, a ­government and industry task team was quickly established to address the ­challenges in the platinum sector by putting in place plans, both short term and medium to long term.

The ANC's recent policy discussion document on the mining sector, "State Intervention in the Minerals Sector" noted that, "given the relative inelasticity of platinum supply and demand (there are no viable substitutes) our producer power could be used to negotiate supply and local beneficiation with international customers".

It also suggested that platinum should be treated like gold in South Africa's exchange control ­regulations, which should be amended to prohibit the sale of "precious metals" without treasury exemption and would also give the state the right to market platinum in addition to gold.