Platinum in pain but price may gain
● As platinum producers close mines at an alarming pace and on a devastating scale, the only silver lining might be that the metal’s price will finally be lifted from persistently low levels.
Impala Platinum announced earlier this week that it would slash 13,000 jobs and close five shafts over the next two years.
While the restructuring is shattering for employees and has attracted a strong reaction from the department of mineral resources, the stock market took the news in its stride.
In fact, the share price was buoyant after the Thursday morning announcement and closed 3.3% higher on the day.
The platinum metal price also reacted positively and was nudged upwards from $818 to beyond $830 on the day. That is because, along with the job cuts and the shaft closures, 230,000 oz of the precious metal will be taken out of the market.
Arnold van Graan, mining analyst at Nedbank Corporate and Investment Banking said the restructuring and resultant loss in production, “is probably a key catalyst for the global platinum supply-demand balance and should be positive for PGMs [platinum group metals] demand and platinum in particular”.
However, the rise in prices would not come through immediately. “Impala is not switching off the tap tomorrow. The big reduction in output will only come in 2021. But in the fullness of time this might have an impact,” Van Graan said.
Ben Davis, mining analyst at Liberum in London, said that while platinum did not always reflect fundamentals, a perceived tightness in the market should reverse the currently negative speculative positioning. “If both Lonmin’s and Impala’s proposed cuts come to pass, we probably should be in a healthy deficit in platinum by 2021,” Davis said. Lonmin is in the process of reducing high-cost production and cutting jobs. There would definitely be a healthy deficit for both rhodium and palladium, Davis noted.
It had long been warned that South African platinum producers were orchestrating their own fate as they were largely responsible for oversupplying the global platinum market, which led to low prices.
According to the World Platinum Council, the forecast for 2018 mine supply from SA had been revised upward from 4.17m oz to 4.35m and oversupply for the year was expected to be 180,000 oz.
It was inevitable that the high-cost producers would be the first to fall over in the face of persistently low metal prices. In SA, this has been worsened by rising costs.
Van Graan said Impala’s approach to the matter struck a balance between the economics and the social imperative.
“Cutting jobs is always sensitive in the South African environment, but they also have to save business.” Even after the restructuring, Impala Rustenburg would not be cash-flow positive at current platinum prices, he said.
It cannot cut production much further either.
If Lonmin’s and Impala’s cuts come to pass, we probably should be in a healthy deficit in platinum by 2021
Ben Davis
Analyst at Liberum
“If they go below 450,000 oz, the next level is probably zero, because below 450,000 oz the operation loses critical mass,” Van Graan said.
On the department of mineral resources’s outcry over the restructuring, Davis said: “Mantashe certainly can’t endorse job cuts in an election year and they should push Impala to mitigate the losses. But at the end of day they are a necessary evil.”
Van Graan said it was expected there would be great pushback from the government and labour as the restructuring was more sensitive because of elections coming up next year while the economy continued to shed jobs.
“It’s bad, but it’s not entirely a reflection on Impala, it’s a reflection on the state the PGM industry finds itself in, and the broader operating environment in SA.”
Ultimately, “you have to sacrifice some jobs to save the company and the remaining jobs it has to offer”, he said.