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Champion of local PGMs exchange cites vested interests, lack of understanding as key impediments to its establishment

Pan-African Investments & Research CE Dr Iraj Abedian
POTENTIAL LOCATION A platinum group metals exchange could potentially be established at the JSE’s premises, in Johannesburg, and could take only between 6 to 12 months
ANDREW HINKLY The current metals exchanges in other financial centres, such as London and New York, operate effectively
PAUL WILSON A South Africa-based platinum group metals exchange could play a key role in expanding the time zone coverage of existing global exchanges, which could increase access for investor
PHINEAS MOHLALA The proposal to establish a platinum group metals exchange locally is “a noble proposition”
MOSA MABUZA The Department of Mineral Resources is currently considering the merits of establishing a local platinum group metals exchange

Pan-African Capital Holdings CE Dr Iraj Abedian discusses the rationale for and the benefits of establishing a local platinum metals exchange

Pan-African Investments & Research CE Dr Iraj Abedian

POTENTIAL LOCATION A platinum group metals exchange could potentially be established at the JSE’s premises, in Johannesburg, and could take only between 6 to 12 months

ANDREW HINKLY The current metals exchanges in other financial centres, such as London and New York, operate effectively

PAUL WILSON A South Africa-based platinum group metals exchange could play a key role in expanding the time zone coverage of existing global exchanges, which could increase access for investor

PHINEAS MOHLALA The proposal to establish a platinum group metals exchange locally is “a noble proposition”

MOSA MABUZA The Department of Mineral Resources is currently considering the merits of establishing a local platinum group metals exchange

Photo by Duane Daws

27th March 2015

By: Ilan Solomons

Creamer Media Staff Writer

  

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As more than 80% of the world’s known platinum-group metals (PGMs) reserves are in South Africa, it is ideal that a PGMs exchange be established locally to ensure that the country receives maximum benefit from its mineral wealth, avers investment company Pan-African Investments & Research Services CE Dr Iraj Abedian.

Abedian has been advocating the establishment of a locally based PGMs exchange for about the past five years.

He highlights the long-term sustainability of commodity exchanges globally, citing US-based financial and commodity derivative exchange the Chicago Mercantile Exchange, which was established in 1898.

Abedian tells Mining Weekly that a commodity exchange essentially allows for structured and systemic price discovery.

“A commodity exchange enables producers to subscribe to a set of protocols to get their output into a market maker or liquidity provider that is ready to buy and sell stock on a continuous basis at a publicly quoted price.”

He adds that it is important that a commodity exchange is not a marketing board, stating it must be a private-sector- managed initiative in which government is a stakeholder.

“Government has the constitutional and political responsibility to maximise the benefits accrued from the country’s assets,” he emphasises, adding that “government would have to ‘fine-tune’ its policies to make a PGMs exchange practically viable in South Africa.”

The National Treasury and the Reserve Bank of South Africa will have to establish institutional frameworks for monetory and financial reporting to enable local entities to enter into futures contracts in nonrand denominations, as they can currently do so only in rands.

There will also have to be regulatory and prudential policy realignments to allow for the daily trading of potentially billions of dollars, yuan and pounds through such a platinum exchange, Abedian states.

He adds that government will also have to carefully regulate these realignments to prevent “massive” fluctuations in foreign exchange movements.

Meanwhile, Abedian says a PGMs exchange could be established in 6 to 12 months at the JSE premises, in Johannesburg, as the JSE already has active wheat and maize exchanges that cater for spot and futures markets.

System Benefits

Abedian asserts that a PGMs exchange at the JSE will generate the entire daily turnover of the current global spot and futures markets of these metals.

He points out that a local exchange will require that the market’s daily turnover be transacted locally, as well as all associated services ranging from physical storage to the drafting of contracts.

Further, the tax benefits and jobs created as a result of establishing a local PGMs exchange will be significant, Abedian states, adding that the high skills set required for these jobs will result in the creation of higher remunerated jobs.

Currently, commodity-trading companies, such as JPMorgan, Goldman Sachs and Citibank, draft and transact PGMs contracts in London and in the US.

“There is nothing that London or New York offers which Johannesburg cannot, particularly as the UK has never produced a single ounce of PGMs and the US is a marginal PGMs producer,” he emphasises.

Abedian adds that PGMs markets are currently uncoordinated, which results in significant fluctuations in PGMs prices, as they are subject to market cyclicality, speculation and other political economy factors, all of which have substantial negative impacts on platinum producers and shareholders.

“All these factors adversely affect South Africa’s national welfare.”

He says commodity exchanges were initially established out of necessity to reduce significant price fluctuations during business cycles, which they have proven to do. These exchanges therefore provide relative predictability regarding commodity prices and return on investments for investors.

However, Abedian emphasises that this does not mean that there will be price controls or that price cycles will disappear.

“All that it means is that the wild and unpredictable swings in the market will be smoothed.”

This is because the market maker provides reliable information about platinum supply and demand volumes in not only the spot market but also the various futures markets.

“This is significant as it will promote certainty among the users and thereby expand the industrial application of the metals,” he emphasises.

No Response

Abedian tells Mining Weekly that he is not exactly sure why there has not been any response to the PGMs exchange proposal.

He says he has engaged government and platinum producers on several occasions about the benefits of such a system for the country, mining houses and investors.

He suspects that the “vested interests” of the existing market structures and the lack of understanding within the industry and in government’s policy creation circles might be largely to blame.

“Platinum producer executives are also unfamiliar with the workings of a commodity exchange and, therefore, are not encouraging government to establish a PGMs exchange,” Abedian adds.

He further highlights that the significant levels of distrust between mining houses and government may also be impeding efforts to get buy-in from the main stakeholders.

Industry Take

Department of Mineral Resources (DMR) deputy director-general Mosa Mabuza tells Mining Weekly that the DMR is currently considering the merits of such an initiative, and the extent to which it advances the “universal objective” of the Mining Industry Growth Development and Employment Task Team (MIGDETT), which seeks to achieve sustainable growth and development of the PGMs sector in South Africa.
“Once this work is concluded, we would be keen to share its detailed findings with our social partners within the MIGDETT and members of the fourth estate,” he says.

Meanwhile, Anglo American Platinum (Amplats), the world’s largest primary producer of platinum, accounting for about 38% of yearly global supply, tells Mining Weekly that the company is not aware of any specific proposals for a PGMs exchange system.

However, Amplats marketing executive head Andrew Hinkly says company representatives attended a seminar in November 2014, in Johannesburg, hosted by the Ntonga and Mapungubwe institutes, as well as Productivity SA.

During the seminar, the possibility of establishing a metals exchange, similar to those operating in London and New York, was discussed.

However, Hinkly states that Abedian gave very few details during his presentation about the proposed establishment of a local PGMs commodities exchange.

“Accordingly, if it is proposed to establish the same type of exchange in Johannesburg, it would be beneficial to model its operations on existing exchanges,” he notes, adding that such duplication might add additional financial services employment in South Africa.

He adds that Amplats has neither discussed the establishment of a PGMs exchange with other producers nor have there been any follow-up meetings or seminars on the subject since the seminar in 2014.

Meanwhile, London-headquartered World Platinum Investment Council (WPIC) CEO Paul Wilson tells Mining Weekly that the WPIC would “certainly welcome” the opportunity to participate in the development of a platinum exchange in South Africa.

“Any exchange that enhances platinum’s consideration as an investment asset in South Africa or internationally will clearly be very helpful.” Wilson also highlights that a South Africa-based PGMs exchange could play a key role in expanding the time zone coverage of existing global exchanges, which could increase access for investors.

Additionally, Minerals Processing and Beneficiation Industries Association of Southern Africa (MPBIASA) president Phineas Mohlala tells Mining Weekly that the proposal to establish a PGMs exchange locally is “a noble proposition”.

However, MPBIASA treasurer-general Sobhuza Nonyane says one of the issues that industry stakeholders need to assess is the long-term viability of such a commodity exchange, particularly in terms of the potential integrated benefits it will provide for the whole value chain structure.

“However, this is a function of market research information, which will be undertaken by analysts over time,” he says.

Mohlala notes that the MPBIASA’s only concern regarding the proposal is whether the exchange, which will presumably be driven by global supply and demand forces, will provide discounts for local companies to buy PGMs at lower prices to enable them to produce goods at competitive prices.

“This will be critically important to ensure full downstream beneficiation is made possible,” he states.

Nonyane adds that, although the PGMs exchange will “undoubtedly” provide significant local financial benefits, it cannot be regarded as an end-all to the matter of local beneficiation as it needs to underpin every aspect of the metals value chain, from exploration to the production of high-value tradeable commodities.

There also has to be downstream beneficiation to allow for not only job creation opportunities but also the establishment of new industries that provide for economic opportunities, knowledge and skills development, which, in turn, will create opportunities for black industrialists to enter the processing and manufacturing sectors, he explains.

Mohlala stresses that South Africa has to be innovative and industry players must provide solutions to ensure that the challenges faced by the downstream beneficiation sector, including the high labour and electricity costs, skills shortages and electricity constraints, are overcome.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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