South Africa: A Dying Star in the Platinum Space?

With a 2012 platinum production total of 128,000 kilograms and total platinum-group metals reserves of 63 million kilograms, South Africa both produces and holds the most platinum in the world, according to the US Geological Survey.

Recently, however, the country’s reputation as a platinum powerhouse has been called into question, largely due to the fact that its influence in the platinum space seems to be fading.

Poor conditions, poor wages

The first hint that South Africa might be losing clout in the platinum industry came at the end of October via an interview that Sprott’s Thoughts writer Henry Bonner did with Andy Jackson, a member of the research team at Sprott Global Resource Investments.

In the interview, Jackson, who is from Zimbabwe and has worked in Southern Africa, explains that two new platinum discoveries may be set to change the way the precious metal is mined in the country. Essentially, the new discoveries, owned by Ivanhoe Mines (TSX:IVN) and Platinum Group Metals (TSX:PTM), should allow for the development of mechanized mines.

While that is a positive development — Jackson sees these new mines as perhaps being able to operate “at a much lower cost with fewer workers and higher wages” — it also highlights the poor state of the mines currently in operation. The majority of those are too narrow to be mechanized, meaning that workers must descend “to depths of up to 4,000 meters below surface, crouching in narrow stopes, with a jackhammer drill, to get the ore out.”

Those poor working conditions have left many miners demanding higher wages, an expense that mining companies can ill afford, according to Jackson. As a result, the country has become a hotbed for strikes.

Strikes fail to move prices

Of course, platinum mine strikes generally push prices for the metal upward. That’s certainly what happened five years ago, when “the threat of production cuts in South Africa was the primary force driving platinum prices to record highs at $2,290 an ounce,” as per Reuters’ Jan Harvey.

Now, however the story is playing out differently. Harvey explains that since that time, the market has stopped reacting so violently to South African strikes, mainly, it seems, because they have become so commonplace.

On that note, Harvey quotes David Jollie, a precious metals analyst at Mitsui, as saying, “[r]ecently, as a strike has been launched, the simple fact of it happening hasn’t been enough to move the price. If you expect the price to move higher, people need to see a more widespread or deeper strike, or a more intractable dispute. That’s the sort of thing that’s required to drive the price substantially higher.”

In a sense, South Africa has become the boy who cried wolf. With strikes happening on what is virtually an ongoing basis, the market is now paying them little attention.

Supply from other areas

Another reason South African supply concerns are no longer as much of an issue is that platinum from other locations has become more readily available.

Highlighting that fact, Allan Seccombe of BDlive quotes Stephen Forrest, director and chairman of SFA Oxford, as saying that in the past 10 years, the cost of producing platinum in South Africa has tripled, “compared to a doubling of costs in Zimbabwe, where mines are far shallower than those in South Africa, and a 1.4-times increase in Russia and North America.”

As a result, “[t]he country’s once-customers are now looking to take its platinum crown from its clutches as South Africa potentially slips into the second, third, fourth place. Just over the African border, Zimbabwe’s platinum-rich resources might be quite the contender. Compound that with the relatively low cost of production, it’s really only a matter of time until Zimbabwe’s platinum is tapped,” he said.

A safer, cheaper future?

Based on the above factors, it certainly seems that South Africa’s grasp on the platinum market is slipping; however, given the fact that it is essentially the existence of dangerous, costly mines that is pushing the country out of the picture, that may not be such a bad thing.

As investors wait for the nation to get its act together, they might do well to start checking out up-and-coming companies in Zimbabwe.

 

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