The four-week strike in South Africa’s platinum sector has echoes of Margaret Thatcher’s struggle to break the mining unions of the UK’s coal sector in the Eighties. Positions were so entrenched that the only outcome was a fracture.
On the evidence of numbers provided by Impala Platinum (Implats) CEO Terence Goodlace on 19 February, the platinum sector has nowhere to go. If it accedes to the wage demands of the Association of Mineworkers and Construction Union (Amcu) it faces restructuring and retrenchments. If it stands firm, however, the outcome may well be the same. Here’s how the situation currently looks for platinum producers:
Revenue booked last year for the sector’s three largest platinum companies – Implats, Anglo American Platinum (Amplats) and Lonmin – was R50.7bn against which roughly half, or R22bn, was spent on salaries.
A further R23bn was spent on consumables and power while a further R8bn was spent on capital development, a level dangerously low to support industry growth when the platinum price recovers, in Goodlace’s view. A f urther R2bn was expended on taxes and royalties while only R800m was provided to investors in dividends – a mere 1.5% of revenue. Considering the fact that shareholders provide the capital, that’s a very slim reward. More than double was paid to Government even though the government doesn’t invest in businesses.
In any event, the industry loss was just over R5bn last year before Amcu’s R12 500/ month basic minimum wage is factored into the equation. Amplats, among others, has worked on improving cost controls, but the wage increases, if applied, will suck the benefits out of the pain currently being suffered.
Naturally, this is bad news for SA Inc, which relies on the platinum sector for employment, foreign exchange and the like. Perhaps more worrying is that the international market has already taken cognisance of the dislocation between demands of labour and the inability of industry to meet them.
The platinum price has been surprising since the strike was called on 23 January, falling $20/oz in the one-month period but showing some volatility. It rose to a high of $1 470/oz and has been up to $90/oz lower in the period.
That is perplexing price activity given that about 60% of all newly mined platinum is sourced from the three companies involved in Amcu’s strike activity. Of the three producers, only Lonmin is completely shut down, nonetheless, you would expect a price reaction in the positive.
Not so, say analysts, because the strike was relatively well f lagged, allowing producers to build stockpiles of up to eight weeks. Chris Griffith, CEO of Amplats, is adamant that the stockpile build was normal inventory and not a premeditated war chest. Still, the platinum price might only start to respond to the prospect of a real deficit in supply if the strike extends to eight weeks.
The other, more worrying, factor is that in the words of one analyst, the platinum market has been weaning itself off the SA dependency by building stocks of its own and developing a recycling supply chain in the autocatalyst industry, especially given the persistence of industrial action over the past three years.
For investors this must present a confusing picture. Piet Viljoen, founder of asset management company RECM says, however, that the business risk currently assailing the platinum producers should not be confused with investment risk which, given the low valuations of the platinum, is currently low.
“Mining platinum out of the ground is by default a risky business. However, if a low price is paid for the company’s shares, this asset is a low-risk investment, despite the riskiness of the business,” he says.