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Platinum Price Rebounds while South African Platinum Production Problems in Spotlight

While platinum spot price rebounded 20% from the end of 2011 to end of February, a basket of major South African platinum producers only returned 7.5%, dragged down by Impala Platinum which fired 17,200 workers and lost 100,000 oz of output (2% of world’s 2011 production) during a 4-week labour strike. Though workers may have agreed to return to work next week, it will take time for full production to resume. The lost output would tip world platinum demand-supply into a deficit in 2012, supporting platinum prices.

While South Africa is rich in mineral resources, Impala’s labour problems highlight the tough operating environment experienced by the South African miners. South Africa produced 73% of the world’s platinum production in 2011 according to Johnson Matthey. Citibank calculated that South Africa’s PGM deposits comprise of 88% of world’s total in 2010. Impala produced 23% of world’s platinum while its Rustenburg mine (where the strike occurred) is the largest platinum mine, producing 15% of world supply.

Platinum mines are among the most dangerous mines in the world. Among the 123 mining deaths in 2011 in South Africa, 30% comes from platinum mines. Government-mandated mine stoppages due to safety inspections has affected production - PGM production dropped 36% in the month of October due to safety inspection. In addition, miners can only sit but not stand in the shafts while they do their job.

However, a mining worker receives about $300-400 in monthly salary, compared to over $100,000 per year in the U.S. or Canada. With strikes and deaths in mines, labour inflation could go up by 10 to 20 percent a year. As the shallow deposits have practically been mined in South Africa, production costs soar as deeper mines are operated, further eating into miners’ profitability.

The upside to this story is the Zuma government has touted the importance of education and mining safety, and pledged to cut power costs and improve infrastructure with R300 billion investments by government-owned Transnet; this should cheer some investors on the longer-run growth story of South Africa.

Sharps Pixley, London
www.sharpspixley.com

01 Mar 2012 | Categories: Platinum

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