LONDON – South Africa’s platinum output is grinding lower as producers cut capital expenditure and shutter unprofitable areas, but it is not happening fast enough to tackle the industry’s bigger problem – rock-bottom prices for the metal itself.
Platinum prices in dollar terms are up just 4% this year in the face of a much bigger rally in other precious metals like palladium and gold, and are 32% below their ten-year average of $1 375 an ounce.
In rand terms, they have fared even worse this year, pushing into the red as the rand strengthens versus the dollar, eroding what little support the miners had.
That is not making the sector particularly attractive for investors, with the Johannesburg platinum index underperforming the main stock index this year.
That reflects the failure of the sector to respond more dramatically to the economic realities of falling prices while also battling a strengthening rand and regulatory uncertainty.
Some producers see a need for a much-needed shakeout which has yet to happen.
“Current metal prices cannot sustain the industry,” said Johan Theron, spokesman for world no. 2 producer Impala Platinum.
“Without the required price support the industry will inevitably contract and restructure to the point where a new equilibrium is found with the requisite price support at a lower production/supply level.”
That restructuring is a long time coming. Despite pressure on the sector and cuts from the top five producers through 2016, South African platinum mine output was still marginally above 2013’s level last year.
Lonmin, the world’s third largest platinum producer, shut between 100 000-160 000 ounces over the last 18 months from its high-cost shafts.
“We believe the industry needs to be more disciplined in reducing the high cost production and Lonmin is doing its part,” chief executive Ben Magara said on Monday.
Lonmin was saved from the brink by a rights issue in late 2015 at a 94% discount. South Africa’s Public Investment Corporation (PIC) upped its stake in the company after the issue was undersubscribed.
That saved the company but did little to placate market watchers who had suggested that the loss of a major producer could help the rest of the industry by sending prices higher.
“The continued existence of Lonmin is of the utmost importance and we therefore expect all stakeholders to continue to support Lonmin with its turnaround strategies and cost cutting initiatives,” said Deon Botha, PIC’s head of corporate affairs.
Closing shafts and laying off workers is politically difficult in a country where unemployment is running at 26% – a fact recognised only too well by potential investors.
“Investors (are) reluctant due to the political situation, with mining jobs being protected over mine efficiencies,” said asset manager London & Capital’s head of equities Roger Jones, whose fund has no exposure to the sector.
Ian Woodley, a fund manager at Old Mutual Investment Group, said poor returns from the sector had at times been overlooked in recent years both by investors taking the long view, or for “less economically minded” reasons.
“Within South Africa no one has the desire the push one of these companies to the wall, because of the social unrest it would cause, and the hardship to many thousands of people,” he said.
“It’s kind of viewed, rather than an economic sector, almost as a social sector.”
The fund has cut its exposure to South African platinum producers over the past few years, he said, though it keeps a watching brief.
There are still those who are prepared to make big bets on South African platinum. South Africa’s Sibanye Gold did so when it bought Anglo American Platinum’s labour-intensive mines and Aquarius Platinum in 2015.
Spokesman James Wellsted nonetheless recognises problems within the industry, which he said was guilty of not managing supply by carrying loss-making ounces and shafts.
“You can’t subsidise loss-making production with profitable shafts,” Wellsted said, referring to a common lever miners pull to keep desperate shafts running.
Despite cost cuts, around 30% of global platinum output – some three-quarters of which comes from South Africa – is still under water, GFMS analysts at Thomson Reuters say.
Taking this out the equation would seem certain to lift prices regardless of demand, but investors are not betting on that happening.