Mining production lags behind recovery by commodities

DESPITE commodity prices apparently entering recovery mode, South Africa’s mining production, which contracted 8.7% year on year in February, continues to fall.

On the face of it, the gains in gold and platinum prices ought to be an incentive to increase production, yet on Thursday, Stats SA released mining production data that showed yet another decline in the industry — far larger than the 5.6% fall predicted by Bloomberg analysts.

The slump in February was the largest since December 2012, when mining production fell 9.2%.

Kobus Nell, portfolio manager at Stanlib Asset Management, said stabilising commodity prices were an incentive for producers to increase production.

“It is a case where if we see some stabilisation and high prices continuing, we will see these guys [mining companies] get incentivised again to get into the market.”

Nell said that typically the response of mining companies to price fluctuations was delayed and an increase in production might be reflected only in the next quarter.

“It’s very hard in the current environment given the volatility in prices that we’ve seen.”

The price of iron ore — South Africa’s weakest mineral in terms of production, with a negative growth rate of 32.5% — rose to about $60 a ton this week, due to a slight increase in Chinese imports of steel.

Production figures for platinum group metals reflected a negative growth rate of 18.1%.

This had been caused by the persistent oversupply in the market and had resulted in platinum mining companies and companies such as Kumba Iron Ore revising down their production forecasts.

Nell said the relationship between commodity prices and production was not clear cut because when the prices had crashed last year, the focus had been on how to “stop the cash bleed”. However, now — despite prices being slightly better and evidence of a gradual upward trend — there may still be uncertainty and continued low production.

The past few months had shown that the mining sector’s production woes were beginning to ease.

Companies had either completed or were close to completing their restructuring plans and retrenchment programmes. The focus now on core assets meant they were better positioned to deal with low commodity prices.

“For now maybe they [mining companies] are going through a relative period of calm,” said Mamokgethi Molopyane, a mining and labour analyst at Creative Voodoo Consulting.

“The fact that the Association of Mineworkers and Construction Union and Sibanye can reach a deal is a positive in the mining sector.”

However, it was difficult to predict whether platinum production would be affected by the upcoming wage negotiations in the industry.

Although mineral sales decreased 1.5% year on year in January, mining stocks on the JSE have rallied in the past two months.

As a result of the weak rand, sales of gold have risen 31% — 12.4% for platinum group metals — according to Stats SA.

However, demand remains low, commodity prices remain uncertain, the rand remains volatile and there remains the upcoming platinum wage negotiations, which might shake production figures even more.

“Expect to see this kind of uncertainty perhaps until towards the end of the year,” said Molopyane.

The fact that Amcu and Sibanye can reach a deal is a positive in the mining sector