Platinum Strike at South Africa

Impact on the Price and Production of the Metal  

South African platinum miners for the world’s top three platinum producers started an indefinite strike in January, threatening production at companies that mine half of the world’s platinum. South African mining companies Anglo American Platinum (Amplats), Impala Platinum Holdings Ltd. (Implats) and Lonmin PLC face a strike by the Association of Mineworkers and Construction Union (AMCU).

At least 70,000 AMCU members started their strike on January 23, in a walkout that is costing the companies about $18 million a day in lost sales. “The management is still looking at a proposal,” Jeff Mphahlele, general secretary of the Association of Mineworkers and Construction Union, said to Bloomberg in an interview. South Africa accounts for about 70 per cent of global production of the precious metal, which is its biggest single overseas shipment.

The AMCU, the biggest representative of workers at the mines, has said it will continue the walkout until its pay demands are met. The union wants wages for the lowest-paid entry-level miners to be more than doubled to 12,500 rand ($1,130) a month. South Africa’s inflation rate was 5.4 per cent in December.

Reason for the strike

South Africa’s mining industry was built on cheap black labour during decades of colonialism and apartheid. Joseph Mathunjwa, Amcu’s president says very little has changed since then. Mining houses, which have offered increases of up to 9 per cent, counter that much has improved in the sector, while admitting more could be done to improve worker’s conditions. They say a R12,500 monthly salary is not feasible in the foreseeable future.

“This is really about an affordability viability issue . . . it’s not to say that in the longer term these types of wage levels that Amcu is talking about may not be possible, but in the short term they are not possible,” said Roger Baxter, a senior executive at the Chamber of Mines, in an interview with Financial Times.

At current prices, 45 per cent of production is marginal or loss making, he adds. “If the industry were to capitulate and concede these demands that Amcu is looking at, it would severely test the viability of a number of companies,” Mr Baxter says.

Platinum’s problems add to the economic woes of a country battling tepid growth, a wide current account deficit and weakening currency. However, analysts at Société Générale point out that the weaker rand helps miners and could allow them to concede higher wage demands than otherwise.

The government, in a sign of concern, has stepped in to help facilitate talks between Amcu and companies – a move welcomed by executives.

Further complicating the picture, workers fed up with the unions formed committees and organised many wildcat strikes in 2012 themselves. Many have since aligned themselves to Amcu, but it is not clear how loyal workers will be to the union if it fails to deliver on its promises.

Following are the key points to remember as the strike proceeds:

Expect Minimal Price Impact

A strike generally leads to a disruption in supply chain that boosts the prices for the metal, provided there is a consistent demand in the market. However, this time, much of the danger surrounding strikes may already be priced-in by markets, according to a note from UBS AG analyst, Joni Teves.

Platinum has already gained $100 per ounce from a recent low in December, incorporating the potential for strikes, and is the top precious metals performer for the year-to-date, gaining 5 per cent. Teves said, “Any further upside from here will depend on whether or not production disruptions due to the strikes are protracted. We think that much of the SA risks appear priced-in by now.”

The platinum sector may already hold enough existing inventory to satisfy global demand for about six weeks, more than the typical four weeks inventory, according to Teves. “Operations would be offline for several weeks before deliveries start to get affected and the impact is felt on the global supply/demand balance,” she said.

Gold, which influences platinum prices, fell in trading too and dragged platinum prices lower, too, as per HSBC Holdings pc analyst, James Steel. “Muted reaction more recently to the announcement for a possible strike may be due to investor awareness of producer stockpiling,” said Steel.

Robust continued demand for platinum globally is also reflected in Chinese imports of the metal, which hit a near four year high in December 2013. Stronger automobile sales have also boosted platinum, which is used in catalytic converters

Production Impact May Be Modest

Immediate impacts to global platinum supply may be modest, to judge by historical examples.

An 11-day strike at Amplats in the fall of 2013 cost them 44,000 ounces in platinum output, relative to the company’s 2012 production of 2.2 million ounces. That’s also relative to a global platinum supply of 5.64 million ounces, according to industry tracker Johnson Matthey.

Implats, the world’s second largest platinum producer, told IBTimes that it lost 120,000 ounces in a bloody 2012 strike, and a further 30,000 ounces as it restarted operations post-strike.

The key point to be watched is the duration of the strike and wage negotiations. AMCU treasurer Jimmy Gama told IBTimes it’s unclear how long the strikes will last for. “It will depend on how quick the negotiations on the wage process take place,” Gama said. “If agreement is reached very late, it might be much longer.”

Both platinum and its sister metal palladium are likely to see supply deficits this year, however, so any cutbacks in production could exacerbate that. Still, industry analysts have known about these supply deficits for a while.

Expect a little change

Mining strikes are nothing new for South African industry executives, especially in the gold and platinum sectors. Aside from the Amplats’ strike in September 2013, widely followed strikes in the summer of 2012 were prompted by lethal shootings at Lonmin’s Marikana platinum mine. Labor unrest over six weeks left 45 people dead in that episode.

This strike is unlikely to be the last in either the gold or platinum sectors in South Africa, which has also witnessed a rivalry between the formerly dominant NUM and the more active and reportedly militant AMCU. Separate planned strikes by the AMCU gold miners, who are only 19 percent of unionized gold miners, could start by early February, according to Bloomberg.

At stake is a struggle for better wages, which mining companies bat back by citing depressed platinum prices and soaring production costs. Mining companies have offered 7.5 to 8.5 per cent annual wage increases over the next two to three years, along with better benefits, and say that compares favourably to both other industries and South Africa’s current inflation of 5.3 per cent.

Implats told IBTimes that their current wage bill is “in the region” of 7 billion rand for the year. They added that basic wages are 4937 rand ($449) for surface workers and 5500 rand ($500) for underground workers, though many employees receive perks like housing allowances.

Implats made profits of 5 billion rand in 2013, according to its latest annual report, on revenues of 30 billion rand. It employed 57,000 people in 2013.

“Demand for our metals has declined in recent years on the back of depressed global markets and declining vehicle demand,” Implats spokeswoman Alice Lourens told IBTimes in an email. “Consequently prices have declined and together with escalating costs have put pressure on the profitability of the platinum industry.”

Costs at Implats per tonne milled have almost doubled from 2009 to 2013, according to company data. Like gold producers, platinum companies have faced profit margin pressure as platinum prices fell 19 percent over the past three years, though production expenses have escalated.

Broader Implications

The strike will have a broader implication on the country’s struggling economy, as platinum is a key export and source of foreign exchange in a nation burdened with a current account deficit totalling 6.8 per cent of gross domestic product.

Many analysts have been bullish on platinum and palladium for 2014 and beyond, expecting them to fare better than gold. That’s because stronger automobile markets in China and the U.S., alongside a recovering market in Europe, lift demand, just as supply remains in a deficit.

“The strikes are going well. The strikes are peaceful, with no incidents of intimidation, and nothing violent is taking place,” Gama told IBTimes. Analysts and mining companies were wary of violence from tensions between the AMCU and NUM beforehand, and called for a peaceful strike.

Evans Ramokga, an Amplats employee who has made the transition from workers’ committee to Amcu co-ordinator in Rustenburg, says workers’ unity “is even stronger than 2012”.

“The mood on the ground is very powerful,” he says. “Nobody is saying anything about the living wage at the end of the day, that’s why you see these strikes. Nobody likes strikes, but this is the only weapon we have.”

 




There are no comments

Add yours

Comments are closed.