Platinum Price Unmoved as South African Strikes Enter Week 11

Strike activity at the South African operations of major platinum miners Anglo American Platinum (OTCMKTS:AGPPY), Lonmin (LSE:LMI) and Impala Platinum Holdings (OTCMKTS:IMPUY) has now lasted for 10 weeks, and the repercussions are mounting. 

For one thing, if the country’s Chamber of Mines is correct, yesterday saw the companies’ combined losses climb to 550,000 ounces, higher than the 544,121 ounces lost last year during violent strike action. The revenue they’ve lost amounts to over $1 billion, also higher than the 2012 amount, states The Wall Street Journal.

Given that South Africa taxes platinum exports, the decline in output is also hurting the nation’s economy; last week, the South African Reserve Bank reduced its 2014 growth outlook from 2.8 percent to 2.6 percent, the news outlet notes. Small businesses, such as pubs and “tuck shops” that sell matches and cigarettes, are also suffering, as per a recent Bloomberg article, and according to Sydwell Dokolwana, the National Union of Mineworkers’ regional secretary in Rustenburg, “many people [are] losing their cars, banks [are] repossessing properties, vehicles and houses. There’s no food. The level of crime is now picking up.”

In terms of the affected companies, it’s Anglo American, known as Amplats, that seems to have taken the hardest hit thus far. On Tuesday, it sent force majeure notices to some of the suppliers of its South African mines, a move that Reuters describes as ”underscoring the widening economic impact” of the strike.

And, while Chief Executive Chris Griffith has said the company is unlikely to declare force majeure to its customers, news surfaced on Wednesday that Amplats is considering a more extreme option: divesting its mines in the Rustenburg area. Bloomberg Businessweek quotes Griffith as saying that day that Amplats has “already indicated we’re exiting Union mines; Rustenburg mines are now part of the consideration. We’re now thinking very seriously: does it form part of the future of this company?”

Prices not reacting

One might think that higher platinum prices would be the silver lining of all the turmoil in South Africa, but so far the precious metal’s price hasn’t reacted much.

While platinum was on the rise just prior to the start of striking, reaching $1,463 per ounce on January 20, it had dropped back down to $1,369 by the end of that month. It then spent February climbing, reaching $1,481, its high this year so far, early in March; however, it again failed to retain that gain, sinking just below $1,400 as March drew to a close. Most recently, the metal closed yesterday at $1,437 — by comparison, its 2013 high was $1,712.

Mineweb’s Lawrence Williams points out a few reasons for this lack of movement. First, he states, not every mine in South Africa is on strike. That said, “perhaps even more importantly some have huge stockpiles and continuing supplies from these are virtually completely negating many analysts’ dire projections.”

Indeed, despite Amplats’ warnings about Rustenburg, Griffith “recently went on record as saying that the company is still operating at about 60% of capacity, despite the strikes, and that it also still has  around 215,000 ounces of platinum in its stockpiles,” as per Williams. That means the company will likely be able to supply the market into June and perhaps longer.

Essentially, that means prices simply “are not yet being driven by specific new supply shortages.”

Death of a platinum star?

The lack of platinum price action helps shed some light on the question of where the South African situation will go next.

Currently, Amplats, Impala Platinum and Lonmin are at a standstill in talks with the Association of Mineworkers and Construction Union (AMCU), which is leading the strike action against them. Causing the hold up is the fact that the AMCU is demanding that the companies raise their entry level salary from about $500 a month to $1,200, an increase that they insist is not feasible.

Writing for Moneyweb, Patrick Cairns delves further into the face off, explaining that the AMCU seems to be operating on the premise that “whatever the platinum producers have to pay their labour will be recovered with a higher platinum price.” However, according to Michael Kavanagh, mining and metals analyst at Noah Capital, that assumption is a “fundamental flaw.” Cairns quotes him as saying, “I would argue that the biggest likely long-term implication of the strike is that the world will reduce its dependence on South African PGMs.”

That’s a possibility that Platinum Investing News explored back in December, identifying the emergence of lower-cost mechanized platinum mines and platinum supply from locations such as Zimbabwe as factors that are helping to reduce South Africa’s influence on the platinum industry.

It’s a little extreme to suggest that the current strikes will result in a total fall from grace for the South African platinum industry, but as Cairns states, “[i]f users grow weary of the constant trouble in our mining sector, they will be forced to look for an alternative — and there must be one out there. It may not be immediately obvious, but it probably does exist, and if the incentive is strong enough, someone will find it.”

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

Related reading: 

South Africa: A Dying Star in the Platinum Space?