Platinum goes splat

Expansion halted as metal falls 40% from peak prices of 2007. It seems like just yesterday that platinum was putting a gleam in the eyes of investors. The booming global economy pre-2007 could not get enough and, with the white metal trading at above $2000 an ounce, mines could not get on stream fast enough.

But soaring input costs, a flooded market and slowing demand from the West have seen the platinum price fall more than 40% from its 2007 peak. It is trading at about $1450/oz with labour and electricity costs skyrocketing.

Investec Asset Management analyst Scott Winship said about 55% of the local industry was losing money, with many operations and expansion plans on ice.

The world's largest platinum miner, Anglo American Platinum (Amplats), cut its capital spending plans by R1-billion a year for the past two years. The miner is on the high end of the cost curve and may sell or mothball some of its operations.

This week Amplats and Aquarius Platinum, which jointly own the Marikana mine near Rustenburg, put the mine on care and maintenance. Closure costs are estimated to be in the region of R200-million, which includes the termination of a contract with Murray & Roberts.

Aquarius also closed its Blue Ridge mine in June last year, where it was initially anticipated that operations would be ramped up and production increased. Aquarius was hit with a $159.8-million impairment charge with the mine's suspension.

Last month Eastern Platinum (Eastplats), which has reported losses for the past two quarters, cancelled funding for its Mareesburg projects and called off a $100-million financing package intended to increase operations after it became obvious that it would be economic suicide to proceed.

On Tuesday Eastplats announced jobs were likely to be lost at its Crocodile River mine. The miner's share price has more than halved in value this year.

The world's third-largest platinum producer, Lonmin, has warned that production plans could change given the unrelenting depressed pricing.

Mineral Resources Minister Susan Shabangu said her department planned to meet with the platinum industry in the coming weeks to assist it , in a similar fashion to what had been done in 2000 to assist gold miners when prices of the yellow metal slumped. One option would be for the government to lower royalty taxes.

Nevertheless, Cadiz mining analyst Peter Major pointed out that current platinum prices were still higher than the average long-term prices for the metal of $925/oz, and growing at an average rate of 12.3% a year since 1985. "What a business!" he exclaimed.

Further, as big producers scale back the number of ounces they are pouring into the market the eight-year-long surplus, will in all likelihood begin to shrink, bringing demand and supply back into some semblance of balance.

About half of all the product taken out of the ground is used in vehicles as catalytic converters. And since the internal combustion engine is unlikely to be replaced any time soon, platinum still has long legs.

But the Western world - where the most platinum-heavy diesel engines are used - is on a go-slow, and autocatalyst sales have been affected. In Europe, new vehicle registrations dropped about 10% year on year in the first quarter.

However, the global economy must ultimately correct and this is the field the platinum bulls are standing in. Niall Carroll, former chairman of Royal Bafokeng Holdings, which owns Royal Bafokeng Platinum, said long-term profitability of the sector remained intact.

King of the Royal Bafokeng Leruo Molotlegi said the group had no intention of curbing any of its platinum production.

Difficulty with labour forces and unions together with extended work stoppages in line with South Africa's section 54 could also see an upward shift in platinum prices.

Implats's recent labour woes were dire enough to affect on the entire country's gross domestic product earlier this year.

To make matters worse, in the world of commodities South Africa is mostly a price-taker.

The future of the industry, however, is likely to look very different to its past.

Miners are increasingly being forced to access UG2, which is deeper and more difficult and expensive to mine. Mechanisation is looming as labour becomes more of an impediment, but whether this passes muster in the local regulatory environment is questionable.

Dubious management, massive pay packets and less than prudent expenditure, which are regularly blamed for mine failures, are also likely to be reset to streamline the new processes going forward.

And let us not forget where the power lies in the platinum sector. Eskom's new coal-fired Medupi and Kusile plants will be coming on stream from late next year, which means there will be more electricity available, but it's not going to be cheap.

There are a great many factors limiting supply of platinum into the market and the basic laws of economics suggest that this can ultimately only be good for the price. In the medium to long term, when global growth begins to pick up, the mothballed mines will reopen and the digging will start again.