The South African platinum mining industry – which hosts about 80% of the world’s resources – is in some distress, with the challenges it is experiencing including sluggish demand and significant amounts of the precious metal being brought back onto the market through recycling, increasing operating costs, greater stakeholder expectations, inadequate funds for capital expenditure projects and the need to improve extraction efficiencies as deposits are becoming deeper and more complex to mine.

But Cadiz Corporate Solutions mining and resources division manager Peter Major is adamant that “the platinum industry crisis” is not that bad, averring that “it is not a meltdown and there are ways through which the platinum industry can recover”.

He believes that the industry “can survive at the current platinum price of $1 700/oz.

“The crisis can be resolved. The state of the industry is the result of a very positive macro environment – the industry grew too fast and, with the money that was coming in, overexpenditure took place,” Major tells Mining Weekly.

But professional services firm Deloitte’s Ebrahim Takolia stresses that companies need to assess all aspects of their operating costs and capital expenditure and improve extracting efficiencies, wherever possible, without compromising on safety, the long-term viability of platinum reserves or the industry.

As the industry is still reeling from events at Lonmin’s Marikana mine – where 34 striking mineworkers died in a standoff with police – picking up the pieces has become a more difficult task than had initially been envisaged.

The effects of the ‘successful’ labour negotiations, which saw the strikers being awarded hefty wage increases, with other mining houses following suit, will now take full effect. Number one platinum producer Anglo American Platinum has issued the first warning signs of buckling under the huge labour costs and other pressures: it has announced plans to close two mines, mothball four shafts, put a mine up for sale and shed 14 000 mining jobs.

“Ultimately, the years of above-inflation wage settlements have caught up with the industry and, for as long as companies are burning cash and mines are unprofitable, the industry will remain tentatively poised,” says SBG Securities PGM equities and commodities analyst Justin Froneman.

The industry has to deal with out-of- control cost increases.

“Inflation has averaged 6% a year and the cost per ounce is pushing 18% a year. With operating costs increasing, mining companies’ net margins are going down; this, in turn, is putting the companies in difficult positions.

“Mining companies’ costs are exceeding their revenue. Cost increases, which are two to three times the inflation rate, are affecting business, which can be attributed to bad management,” says Major.

The platinum-group elements (PGEs) industry seems to have lost its grip on cost. In the last decade, cash costs have quadrupled on the back of cost inflation running well above global averages. The cost of electricity nearly doubled, the prices of diesel and steel rose at twice the inflation rate and the average wage increase was consistently a few points ahead of the consumer price index.

In spite of increased remuneration, the trends in the labour force are declining productivity and heightened expectations of employees and associated communities. The wave of violent strikes, which crippled the PGEs mining industry and spilled over to other sectors of the national economy in the latter half of 2012, was accompanied by intense union rivalry, in which the escalation of demands by the unions, often beyond economic reason, seemed to be the only way to gain the support of workers, who were becoming increasingly radical.

“Communities, employees and mining companies have faced significant pressures from rising costs in the last five years, which have diminished the disposable incomes of communities and employees and significantly reduced the margins of platinum mining companies.

“As a result, employees and communities want more and, currently, platinum miners do not have more to give,” explains Takolia.

This sort of behaviour in the industry will continue for as long as the relationships between platinum miners, employees and communities remain adversarial, he says.

Government needs to step up and regulate the control that unions have in the bargaining process, similar to what has been achieved in the gold industry, Takolia says.

“Collective bargaining prevents miners from playing companies against each other. Years of above-inflation wage increases are unsustainable,” says Froneman.

Takolia notes that a possible solution to this would be to create an advisory board, comprising all stakeholders, including communities and employees, to ensure that operations are managed in the long-term interests of all stakeholders.

Major agrees, adding that all four legs of the industry – mining companies, government, labour and communities – need to work together to counter these challenges. “Communities need to deal with these challenges and discuss possible solutions on equal terms.”

News agency Reuters has reported that platinum and palladium prices are expected to struggle in 2013, with analysts drastically scaling back expectations for both metals as the eurozone debt crisis threatens worldwide economic growth.

Some believe the challenges facing the industry are likely to remain unless there is a mindset change in the industry. Major, who shares this view, says: “Bad habits have been created over the last ten years and mining houses have had low productivity increases. You have to have productivity increases and there were none in the last ten years.”

The 2012 platinum report by Johnson Matthey notes that South African platinum producers have suffered owing to stoppages and low productivity.

Global Market

The global platinum market is in surplus and is forecast to remain in structural oversupply for a few years.

Johnson Matthey believes that the market moved into a supply deficit in 2012, although there is some “overhang” of surplus metal from previous years.

Deloitte notes that the oversupply is likely to keep the price of the metal in the range of $1 450/oz to $1 750/oz, which does not cover the costs and stay-in-business capital of more than half the South African platinum mining operations.

“Most of the demand for platinum came from exchange-traded funds – investors that buy the platinum – and they now hold 1.5-million ounces of platinum. Should they lose interest in platinum, they could potentially flood the market – they have the potential to flood the market,” says Major.

The demand has not been great but Major notes that it has been growing at about 1.5% a year. Platinum producer Anglo American Platinum forecasts a growth in demand of 4% every year.

The supply and demand relationship indicates that metal prices will rise should a supply squeeze occur.

“However, as metal prices rise, there is a definite need for the industry to remain competitive and control current unsustain-able cost inflation,” says Froneman.

Takolia says that the change in supply and demand can also be seen in the recycling of platinum. Recycling has been on an upward trend for the past ten years and has stabilised platinum prices, but at lower price levels.

“Increasing recoveries from recycled platinum, particularly from automotive catalytic converters that might contain up to 2 000 g/t of platinum-group metals in a ceramic catalyst brick, have resulted in more recycled platinum coming onto the market.

“These factors have fundamentally changed the demand and supply balance and, unless there is significantly new demand for platinum, prices will be subdued in the medium to long term,” says Takolia.

Froneman states: “Mining inflation currently runs at 12% to 15% per year, largely driven by labour and underlying electricity price inflation. For as long as this inflation rate continues and the PGM basket price does not sufficiently appreciate to compensate for these increases, the South African PGMs industry will remain under pressure, particularly at a free cash-flow generation level.”

Platinum’s main demand comes from autocatalysts in motor vehicles. The slump in automotive sales in Europe has been more than countered by an increase in demand from developing countries in Asia.

“As long as emissions standards are tightened, global demand for the metal will continue. Owing to the recent supply squeeze from South Africa and forecast demand-side growth, we believe the market will remain in a growing deficit for the metal in the short to medium term,” concludes Froneman.