JOHANNESBURG (miningweekly.com) – Despite multiyear low platinum prices and significant demand uncertainty in the key markets of autocatalysts, jewellery and investment, a sector report by investment banking firm Liberum has asserted that the “cash flow-destructive” South African platinum sector continues to attract bids and rescue financing.

The sector had, since 2010, attracted $5.4-billion in investment from equity markets and companies speculating on improved platinum group metals (PGMs) prices, despite poor demand outlook and continued high cost inflation from wage hikes, power bills and falling productivity.

“The platinum sector, even at the death, still manages to raise funds from capital markets and complete deals with companies betting on higher prices in the future,” Liberum analysts Ben Davis and Alexandre Schmidt noted in a report titled ‘Platinum sector on life support’.

They added that the marginal assets in the South African platinum sector should have been "put to rest years ago”, but management instead chose to cross-subsidise rather than lose the potential upside or face the reprisals of causing job losses in a country with 25% unemployment and militant unions.

“Without the supply-side rationalisation, it is difficult to see how the PGM rand basket price will sharply rise and keep the currently cash-destructive sector viable.

“Given the numerous challenges to the South African economy, a weakening rand is a safe bet. However, the supply and demand fundamentals for platinum are far from certain and what was assured deficit in past years is now a small surplus,” the report authors argued.

Liberum cautioned that the failure to close marginal assets would likely see the sector suffering from continued weak returns; however, neither the companies nor the South African government appeared willing to suffer the reprisals of the resultant job losses.

“Production profiles have been trimmed, but there has yet to be any dramatic curtailments of capacity, as marginal assets continue to be saved.

“A flat cost curve by companies has led to the cross-subsidisation of shafts for many years, as management have not wanted to lose the potential upside or face the political reprisals of causing job losses. Wage negotiations are due next year but are unlikely to result in strikes in 2016, as unions seek to draw out negotiations,” noted the report.

Observing the drivers of PGM demand, the report noted that the recent Volkswagen emissions scandal had likely cemented the decline of diesel-powered vehicles, which accounted for 40% of overall autocatalyst demand.

In the long-term, platinum may be substituted back into petrol engines if prices equalised with palladium, it suggested.

“Assuming the death of diesel in small vehicles does come to pass as fuel economy advantages wane and fiscal friendliness dissipates, the demand should initially shift from platinum to palladium.

“However, purchasing managers have to consider resource scarcity when planning for the longer term. Given that the effectiveness of platinum and palladium in gasoline engines is basically the same, their fortunes should be largely tied longer term,” it held.

Meanwhile, in the platinum jewellery market, typically price-elastic jewellery sales in China had been poor owing to the anticorruption drive and weak marriage rates.

Physically backed exchange-traded fund investment demand had also fallen in both platinum and palladium against the stronger US dollar.

“Autocatalyst, jewellery and investment demand is all suffering and is likely to be constrained for a couple of years,” Liberum maintained.

Davis and Schmidt, meanwhile, asserted that a straight equalisation of platinum and palladium prices would not be beneficial to the typical South African miner, given that they produced twice as much platinum as palladium.

Should spot platinum and palladium prices reach an average of $855/oz, this would, they argued, imply a 7% reduction in revenues.

On the supply side, the firm did not expect supply shocks in 2016, despite the approach of the wage negotiation season.

“The same predictable deadlock is expected, as companies simply can not afford to pay a living wage to the workers.

“However, majority union, the Association of Mineworkers and Construction Union (AMCU) has shown it will not rush into a strike and it is unlikely its members have the appetite to do so either. More likely is that AMCU run go-slows during the negotiations that can be even more damaging than a full strike,” read the report.