2013 Platinum Price Contingent on South African Supply

Thomson Reuters GFMS’ Platinum & Palladium Survey 2013 heralded an onslaught of speculation about how South Africa’s labor situation will affect the platinum market. 

In its annual report, released in May, GFMS states that while demand was fairly stable in 2012, platinum recorded a slight deficit of 2.6 million metric tons (MT), its first in seven years, “almost completely” due to decreases in supply from mining, as well as autocatalyst and jewelry recycling. Respectively, supply from these sources contracted by 10 percent, 9 percent and 19 percent.

The publication highlights that the 10-percent drop in mining industry supply translates into a 19.1 million MT decline from the previous year and was largely the result of “illegal strike action in the South African industry that drove a 12% drop in refined mine production,” a view that is echoed in Johnson Matthey’s Platinum 2013 report, also released last month. Speaking at a presentation accompanying the GFMS report’s release, William Tankard, mining research director at the firm, commented, “[t]he pieces are in place for further labour unrest as we move into the wage negotiation period in South Africa, and shaft restructuring plans are under discussion with the government.” If those two factors do end up causing problems, the firm expects “South African platinum output will fail to rebound this year even after a calamitous 2012,” Tankard said.

In terms of price, that could be a good thing. Tankard emphasized that ”[t]he demand outlook, particularly in Europe, remains fragile and platinum supply therefore needs to be kept reined in for prices to strengthen.” If restructuring occurs and supply is “kept off the table” in South Africa, GFMS sees the metal’s price averaging nearly $1,600 this year.

Implats cuts jobs

Since the report’s release, a variety of news agencies have highlighted the precarious position that platinum prices are in as a result of South Africa. At the heart of the matter is Anglo American Platinum (OTC Pink:AGPPY), the world’s largest miner of the metal.

In January, Amplats announced that in order to “create a sustainable, competitive and profitable platinum business” with the ability to benefit its stakeholders in the long term, it would need to make a variety of changes to its business that could result in the elimination of up to 14,000 jobs, most in the Rustenburg area.

Unsurprisingly, the news provoked an unfavorable reaction from the South African government, ultimately leading to a compromise in mid-May: a revised proposal from Amplats states that it will cut only 6,000 jobs, significantly down from the initial number.

On May 24, Amplats, its unions and the South African government resumed talks regarding the company’s restructuring under the Commission for Conciliation, Mediation and Arbitration, noting that the new proposal will be taken into account.

Is 6,000 enough?

While 6,000 is no small number of jobs to cut, market players are uncertain that it will be enough. That sentiment is evident in an article published in The Wall Street Journal prior to the release of Amplats’ revised proposal; it cites investors as believing that “[i]f Amplats cuts production, global supply will fall behind demand, pushing prices higher,” but “[i]f the company doesn’t reduce output by as much as planned, the market will be flush with unwanted metal, and prices will fall.”

On that note, Ronald Wildmann, managing director at Zurich-based Basinvest, told the publication, “I would say it’s the most important trigger for prices. It’s very important that they cut production,” while Nicholas Johnson of Pacific Investment Management was quoted as saying, “[t]he market is expecting them to deliver on the majority of their cuts.”

These predictions do not bode well in light of the fact that Amplats now plans to cut 6,000 jobs, not 14,000. However, there is some cause for hope in the fact that Johnson believes falling prices will be checked if platinum production is reduced by 300,000 troy ounces this year. That’s because Amplats’ revised proposal entails cutting its production capacity by about “250,000 ounces per annum in 2013 and by an additional approximately 100,000 ounces per annum in the medium term.”

Other factors at play

While Amplats is a major factor in the South African platinum market, it is not the only one. Here are two more that could impact the sector:

• Wage negotiations: Sprott Asset Management’s David Franklin said in a recent note that on June 5, the South Africa National Union of Mineworkers will “present a demand for a wage increase of ‘no less than 10% and up to 60%’ for its industry members to take effect from July.” He believes that request will be “difficult, if not impossible” for the major platinum miners to meet. 
• Government intervention: Susan Shabangu announced last week that in order to maintain the viability of its platinum and gold industries, South Africa may make unspecified “interventions” into the sectors.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

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