Major platinum cuts unlikely, says Griffith

[miningmx.com] – A VIEW doing the rounds is that South Africa’s platinum producers are the architects of their own troubles owing to a reticence to lower production; in fact, production is increasing.

“The majors have all concentrated on ramping-up capacity instead of restructuring as a way of reducing unit costs,’ said Goldman Sachs in a recent report.

Allan Cooke, an analyst at JPMorgan, raised a similar objection at the interim results of Anglo American Platinum (Amplats) earlier this week asking if the Anglo American firm was actually “managing for the current environment’ as it contended.

Said Chris Griffith, CEO of Amplats: “We have now got more headwinds and we need to keep looking at where we’re profitable and where our mining needs to be as efficient as possible’.

The point he was making is that, yes, the company was looking to its own interests, and not industry-wide issues, by focusing on increasing volume in order to lower unit costs.

In a conference call with media earlier that day, Griffiths said Amplats had already taken pain by restructuring in 2013 in which labour numbers were reduced to 8,700 from 32,000 at the Rustenburg and Union section mines.

Interestingly, production from those two sections will increase by 80,000 ounces between the 2015 and 2017 financial years. “Firstly, we’ve already cut our production and secondly, we continue to cut production when we are producing unprofitable ounces,’ he said.

Nonetheless, the point remains that the platinum price is caught in the doldrums. Global light duty vehicle sales, which are important because cars use platinum in their autocatalysts, rose a mere 1% in the first half of Amplats’ financial year compared to a year ago while jewellery sales to China were on the wane. Investment demand, as shown on the Shanghai Gold Exchange, fell 12% from January to June.

“With demand remaining tepid we forecast the metal to be in a structural surplus,’ said Goldman Sachs. “We remain cautious on the platinum price and expect it to remain depressed to incentivise mine closures,’ it said.

Whether mine closures of size will ever occur in South Africa is questionable. Asked how he saw supply from South Africa developing, Griffith told Miningmx that major cuts in output were unlikely, but there will be some changes especially to expansionary growth.

“At these levels I don’t see massive mine closures, but I do expect to see some production fall. When the platinum price was $1,200 per ounce you saw some companies doing tweaking. Now, you will see small reductions in production and big reductions in costs with capital projects falling away.’

It has been observed that restructuring in South Arica is also such a hot political potato with the government and unions, that major surgery is hard to achieve – a view Griffith said was probably more applicable when his company announced the Rustenburg restructuring in 2013.

“We were stone alone at that point. No-one was lifting their head above the parapets,’ said Griffith. “If anything, it’s probably easier now from a political point of view.

“We tend to think of ourselves (in South Africa) as completely alone in this but all governments globally don’t want their private sectors cutting jobs and closing industry. It was almost impossible a few years ago,’ he said.

Regardless of whether South Africa platinum production pulls back or not (likely not), the market is in the hands of macro-economic factors. “We do see demand increasing but not too many changes in the medium-term,’ said Griffith.

“It’s the macro-economic issues that are weighing down pricing such as the strength of the US dollar and the weakening outlook in China whilst Europe has also had an effect. So we anticipate the price (of platinum) to be weak for some time,’ he said.