The news that South Africa and Russia are considering establishing a platinum group metals (PGMs) trade bloc has been greeted with caution by legal experts and analysts.
The proposal is not entirely unfeasible, they said this week. But they added that more detail from authorities would be needed for its impact to be understood and any potential plan would require very careful management.
According to several media reports following the Brics (Brazil, Russia, India, China and South Africa) summit held in Durban last week, Russia and South Africa held talks about setting up a platinum entity along the lines of the Organisation of the Petroleum Exporting Countries (Opec) in a bid to curb volatility in the market.
Together Russia and South Africa account for about 90% of the world's mined supplies of PGMs, which include platinum, palladium and rhodium. They are used in catalytic converters, which reduce carbon emissions from vehicles.
A 'framework' accord
Bloomberg quoted Russia's Natural Resources Minister Sergey Donskoy as saying the countries had signed a "framework" accord to establish what could be compared to an Opec, with further details yet to be decided. Mineral Resources Minister Susan Shabangu said that the countries were seeking to influence the market without creating a cartel, according to Bloomberg.
Peter Major, head of mining and resources at Cadiz Corporate Solutions, said the proposed bloc could break international trade law and agreements and run into headwinds from competition authorities, particularly in regions such as Europe.
China is the world's largest consumer of PGMs globally, with the European Union the second-largest. It remains to be seen how these major economies will respond to efforts by Russia and South Africa to increase control of the PGM market.
"I can't see them liking it very much," Major said, but added that Opec had done "a lot more good than harm" in helping to bring stability to the oil price.
The establishment of a similarly styled platinum body would be dominated by Russia and South Africa, unlike Opec with 12 members, Major said. South Africa alone accounted for 59% of global PGM production in 2011 and a bit less in 2012, according to Cadiz data. South Africa produced 75% of the world's platinum, 39% of its palladium and 84% of its rhodium.
Only in palladium production did Russia produce more than South Africa, accounting for 41% of mine supply in 2012. Other countries such as Canada and the United States accounted for 8.9% of PGMs and Zimbabwe accounted for 4.6%.
Controlling the makert
Given these numbers, South Africa could be its own cartel, according to Major, which would be far less politically ominous than uniting with Russia.
But he questioned how the government would control the market, given that private companies, including major multinationals such as Anglo American Platinum, drive supply.
Inadvertently, the state has already done more to restrict production by allowing the electricity supply to become constrained, and by failing to provide an environment governed by the rule of law — as seen during recent strikes — and a stable administrative centre for mineral rights, Major said.
Nevertheless, the creation of such a bloc is not entirely unfeasible, he said. Questions remain about how it would be achieved, and whether South Africa needs to enter into such an arrangement given its dominance in the PGM market.
"Normal free market economics is likely to have nearly the same effect by causing mines to close unprofitable production during low metal prices and reopen such sections during boom times," Major said.
A commodities analyst at Stanlib, Kobus Nell, said what was important was determining what was best for long-term, sustainable demand for PGMs.
Deep-level mining
He said the sector, which is characterised by deep-level mining that requires long lead times before investors see a return on their capital, has experienced a great deal of price volatility in recent years.
Companies have also misread the market, over-investing in production when platinum demand increased, and these boom-and-bust cycles are currently being played out in the troubles experienced by many mining houses.
But any efforts to control supply by the proposed creation of an Opec-style body would have to be very carefully managed, he said, or it could harm demand in the long run.
Managing the price dynamics between palladium and platinum would also be a challenge, Nell said.
Given that Russia produces more palladium than South Africa, and that South Africa produces more platinum than Russia, a bloc that cornered both metals could possibly work, he said.
"They could manage it to a point but would have to be very careful as it could result in unintended consequences," he said.
Other aspects of the market, such as the marketing, fabrication and distribution of PGM metals is fairly complex and it remains to be seen how this could be affected, Nell said.
Companies such as the chemicals firms Johnson Matthey and BSAF, both producers of catalytic converters, are major players in this field.
According to Nell, Anglo American Platinum has already started to amend the terms of its relationship with Johnson Matthey and similar firms, indicating that it is seeking greater control of the PGM supply chain. Early this year, Johnson Matthey announced a new supply agreement with Amplats, which will result in a loss of commission for the firm to the tune of £35-million.
No enough details
However, the government has not yet disclosed enough detail about the terms of the arrangement with Russia to allow its potential implications to be understood fully, Nell said.
Several legal experts said competition challenges may not be a problem for the two countries but it is not clear how the body will work.
Robert Wilson, a partner at the law firm Webber Wentzel, said that at present there is no global competition law code governing the conduct of states, and domestic and regional competition law generally seeks to regulate the conduct of private entities.
He gave the example of an American district court decision in 1979 that classified Opec's pricing decisions as "governmental" acts of state, as opposed to "commercial" acts, and thus held that the decisions were beyond the legal reach of American courts.
The South African competition authorities are likely to take a similar view, according to Wilson.
The memorandum of understanding is between South Africa and Russia, two sovereign states, he said, and it does not appear they will be subject to any supranational competition law.
However, how the proposed platinum cartel would work was not clear, he said.
"The South African platinum producers in question are all privately owned trading firms. If they colluded to fix prices or trading conditions, they would be hit by the cartel provisions of the Competition Act, which prohibit such conduct.
"The only way I think South Africa and Russia could co-operate at an interstate level would be through state-imposed restrictions on exports, which would potentially engage their international trade law obligations."
According to Wilson's colleague, Peter Leon, head of Africa mining and energy at Webber Wentzel, South Africa and Russia are members of the World Trade Organisation (WTO) and are subject to its general agreement on tariffs and trade (Gatt). South Africa is also a party to the 1999 trade, development and co-operation agreement (TDCA) with the European Union, he said.
The creation of a body modelled on Opec will not necessarily breach Gatt or the EU agreement, he said.
However, actions taken by the countries as a consequence of their membership of the body could breach these agreements, Leon said.
For instance, in order to influence world platinum prices, the countries might choose to impose export restrictions on their producers or levy export duties or taxes on their producers. Under certain articles of Gatt and subject to some exceptions, member states are prohibited from imposing quantitative restrictions on exports, he said. However, it exempted duties, taxes and other charges levied on exports.
Donskoy said that the countries will operate within WTO rules, according to a Reuters report.
But a broader prohibition on quantitative restrictions on exports is contained in the TDCA, which protects exports from South Africa to EU member states. Article 19 of the TDCA, read with article 27, prohibits the imposition of "quantitative restrictions on … exports and measures having equivalent effect on trade" between South Africa and EU member states.
But Leon said no definite opinion can be offered before more details of the proposed agreement and the actions or measures the envisaged body might take become clearer.
The department of mineral resources did not respond to requests for comment.