JOHANNESBURG (miningweekly.com) – South Africa's mining production dropped for the second successive month in a row, mainly owing to declines in the platinum group metals (PGMs) market, official data showed on Thursday.

Statistics South Africa's latest report, which was delayed owing to an IT problem at the Department of Mineral Resources, showed that production dropped by 4,9% year-on-year in June, following a 7,6% year-on-year decline in May.

The second-quarter mining production was 6,7% lower than the first-quarter output, driven by the declines in PGMs and coal production.

Investec's Kgotso Radira said that the weak data from the production side of the economy made a strong argument for an interest rate cut, given that the inflation outlook remained favourable well into 2011.

The report showed that PGMs production declined by 19,3% in June, partly owing to seasonal maintenance of smelters. However, Radira said that the outlook for the PGMs, which was used in the automotive sector, was looking positive as the world's economies moved to lower carbon emissions.

"Rising production costs, rand strength and the slowdown in the global economy remain the key risks for the sector," he commented.

Gold production fell with 5,3% year-on-year, but production of the yellow metal had been on the downward path for a number of years and would be further impacted by higher input costs, owing to the 25% electricity increase that took effect in April, and the application of mining royalties.

"Additionally, there have been safety related stoppages in the gold industry, due to closures related to accidents and it is important to note that jewellery demand is still fragile as households' finances have not improved drastically to boost demand," Radira noted.

On the positive side, the production of diamonds, iron-ore and manganese-ore increased in June, as global demand improved on the back of inventory build up.

Overall, Radira predicted that industrial demand would be a key driver of mining production growth, and would likely stem from emerging market economies.

"We expect a further slow down during the second half of the year, in line with Investec's forecast of growth averaging 2,8% this year. With the recovery still frail, an interest rate cut would help boost confidence and provide some relief to highly indebted households."

Investec believed that an interest rate cut was likely during September.