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Solving the problems facing the platinum mining sector: Claude Baissac – economist, Eunomix

‘I think it’s going to be a really hard year for the mining industry in South Africa. ‘

HILTON TARRANT: Well, a chaotic and tense fallout following the restructuring announcement by Anglo American Platinum on Tuesday. Government, through Minister of Mineral Resources, Susan Shabangu, particularly vocal; organised labour also vocal about those restructuring plans. Executive director of Eunomix, Claude Baissac, joins us now. Claude, the reaction that we saw from government and organised labour – I guess not a surprise given how this was handled by Anglo American Platinum?

CLAUDE BAISSAC: Well, I don’t know if you could say that Anglo Platinum mishandled this. I think Chris Griffith yesterday, the CEO, came out saying that they had to handle it the way they did because they have a legal obligation in relation to the Department of Labour, labour legislation in South Africa and they have obligations in relation to the JSE. And that therefore they are not at liberty to do exactly as they wish or as the Minister wishes. So a bit surprised, in fact, by the reaction of the Minister. I think it’s overblown and to a large extent it’s political. But in a way I think it’s counterproductive. Labour, yes, entirely expected. We know that labour relations are very tense right now in South Africa in the mining and other sectors, so not surprised at all that this was going to happen. We issued a warning to some of our clients in December, telling them that they would have to be very, very careful in how they managed the announcement and implementations of the restructurings that the platinum industry is going to have to go through because of the heightened political and social risk in South Africa. …

HILTON TARRANT: Claude, those fundamental problems you mentioned there, given that there is some willingness to get some sort of consensus between government, in this case Anglo American Platinum, as well as labour, what are those fundamental problems and can these three parties ever reach consensus on what seems to be a very, very difficult situation?

CLAUDE BAISSAC: The fundamental problems are well known, except they are not accepted by all the parties. But you can’t cheat economics.
   Fundamental problem No 1 is the rising cost of labour and the rising cost of electricity, which are accounting now for an overwhelming majority of costs in the mining industry.
   Fundamental problem No 2 is the fact that those increases are not connected to productivity gains.
     Fundamental problem No 3 is that we are continuing to have uncertainty over the kind of regulatory framework, government policy and investment climate in the mining industry.
   That is leading to not simply a lack of investment or an investment, but the mining companies pulling out, retrenching, cutting back their presence in South Africa. So we are facing effectively what is a sectoral recession, not because simply of environmental issues in the world economy but because of a fundamental lack of competitiveness in South Africa.
   So that’s the key problem. Obviously labour sees it in a different way, obviously government sees it in a different way. Government is now embarking and we can see that in the draft legislation that has been proposed amending the MPRDA [Mineral & Petroleum Resources Development Act]. We’re seeing an increase in what you would call resource nationalism. There is now some proposal for the state to have free carry in oil and gas projects and discretionary powers for the Department of Mineral Resources. So lack of sign that the government is understanding how deep and how serious the crisis is. And in terms of the industry a necessity to do what they have to do to remain in business and tothe economic and political risk that South Africa represents for their bottom line.
     But that diagnostic doesn’t seem to be understood and shared and until it is understood and shared by all the parties I think there will not be enough good sense to come together and find solutions that are well-devised and capable of making a difference.
   So I think the notion that the crisis of 2012 is behind us is inaccurate. I think it’s going to be a really hard year for the mining industry in South Africa. …

HILTON TARRANT: Claude, just to close off with, what we’ve seen this fallout over the past three, four days from this announcement from Anglo American Platinum. Is this the shape of things to come for the sector? Does this set the tone for 2013?

CLAUDE BAISSAC: That’s a difficult one. We’re expecting that some of the mining companies in the platinum sector are going to restructure. Lonmin obviously is going to have to make some changes to its business model; they’ve announced it. Obviously they will be now sensitised to the risk associated with that through the Amplats case. So certainly in terms of internal efficiency that’s surely going to happen. We’ve seen already a lot of operators disappear or temporarily disappear last year.
   So yes, we’re going to end up with a smaller, more productive and hopefully more profitable platinum sector. But that’s going to be a difficult transition phase, including a lot of labour uncertainty, often in a very difficult labour environment, and a lot of political to-ing and fro-ing, which is going to do nothing to reassure investors.
   So I think everybody is going to be kind of sitting tight and watching what happens in the platinum sector and hoping that we can come out at the end of that particular tunnel with something that is more efficient. But I doubt very much that the other side of the debate or the drama will be satisfied with what they get because it will be less jobs, less economic value added, small rand and so on and so forth.

     So the risk is that this restructuring, which is imperative, leads to, once again, calls for state intervention, nationalisation and the reversal to 2009, 2010 and calls for more radical action. I think that’s the dangerous feedback loop we’re facing; it requires a tremendous amount of very, very active mature engagement on the part of all the players.

HILTON TARRANT: And we’ve seen one or two of those radical calls in some quarters over the past few days. Claude Baissac is MD of Eunomix.

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