Platinum's allure is questionable
To make money from South Africa's $28-million-a-day platinum industry an investor needs nerves, brains, faith and luck.
Despite the allure of platinum group metals (PGMs) – platinum, palladium, rhodium, ruthenium, iridium and osmium – for all their scarcity, usefulness and monetary value (more than $1 000 an ounce), platinum mines worldwide, and particularly South Africa's, have not been a great investment. And therein lies the insurmountable gap between South Africa's platinum mines and their labour: there is not the money or expansion even to begin to fulfil everyone's needs, let alone their desires.
Even more tragic are South Africa's 7.5-million unemployed people, desperate for any kind of work, compared with the 150 000 full-time platinum mine employees – a 50-to-1 ratio of have-nots to haves.
So if the mining industry, with 500 000 employees, is the industry that pays the highest average wages in the country after the government, why are we having the constant violence and mayhem of illegal strikes, especially on the platinum mines? Why are unions fracturing, miners protesting, striking, killing and dying? Why is the government dictating to and everyone blaming the mines?
South Africa has almost 80% of the world's known PGM reserves (more than two billion ounces) and produces more than 4.5-million ounces of platinum a year (75% of world mine supply) and more than four million ounces a year of the other PGMs. But there are no shortages to push prices higher. At $1670 an ounce today, platinum is double its 100-year average real price of $830 an ounce. Can it really go much higher?
From 2001 until August this year, the dollar platinum price barely rose 8% a year. In rand/ounce terms, the rise was more than 9% a year.
Basket of revenue
But platinum mines earn revenue from all the PGMs and base metals they extract, although platinum averaged 60% of revenue. This basket of revenue increased by barely 4% a year in rands during the past 12 years. But South Africa's inflation rate averaged 6% a year, wages increased more than 11% a year, and other costs even more. The platinum industry's total rand-to-ounce costs increased by 19% a year from 2001, although since 2008 it has risen 0%.
Net profitability on half of South Africa's platinum mines is now almost zero. With 50 unemployed people in South Africa for every one person employed in platinum mining, if mines cannot hire who they want on terms agreed to by both sides at today's PGM prices, what will happen if prices fall back towards their long-term real averages?
Plus, we now have the irony of Lonmin's illegal striking miners borrowing from loan sharks to feed their families, and Lonmin directors, just as desperate, searching for bridging loans to keep the mine open and its creditors, owed $1-billion, at bay.
Meanwhile, South Africa's platinum and gold mines need to get back to work – and at full uninterrupted production too. But the mines and their employees need the government's help to do this. The government needs to re-establish respect, discipline and adherence to the Constitution and all the rules and regulations that go with a free-market economy and a management, union, employee and government relationship. The government can no longer turn a blind eye to illegal and violent wildcat strikes that always result in intimidation and destruction. And the government needs to amend its destabilising and costly system of closing mines for days on end for infractions and accidents that happen. This policy has to be re-examined and improved.
South African road accidents kill 90 to 100 times more people a year than its whole mining industry. And gun deaths average 100 times more deaths a year than our mines.
What else needs to be done to attract investors to South Africa's besieged platinum industry? All South Africa's mining companies need to be more proactive with new technologies, work processes, systems and ways of doing things. But they need their employees to help.
Ironically, Lonmin had announced only weeks before Marikana that it was "throwing out" much of its tried and failed mechanisation of the past decade owing to high costs and non-delivery of key objectives. This shows labour has a powerful place in making the platinum mines more productive and profitable.
Labour unions need to communicate with, educate and discipline their members better. In many ways, the National Union of Mineworkers has done too good a job for its members over the past 30 years, especially the past 10, getting its members double-digit, double-inflation wage increases with no increases in productivity.
It is also ironic that the pension funds of unions the world over have invested in South Africa's platinum mines, whose employees are now trashing and threatening to destroy. Insane. But the government has brought matters to where they are today – it mollycoddled demonstrators involved in illegal action in order to not lose their votes.
In 1900, South Africa had four million people. There was plenty for everyone – land, food, water, employment and minerals. Today there are 50-million South Africans and still plenty of minerals. So the government, unions, investors and responsible, educated and accountable employees are needed more than ever. Metal prices are high, demand strong and growing, and infrastructure world class. Nationalisation and centralised bargaining are neither the problem nor the solution. South Africa just needs its people to negotiate, agree and deliver in good faith.
If they do not, the other 194 countries will take our place.
Peter Major heads the mining and resources division of Cadiz Corporate Solutions