[miningmx.com] – A CUT in platinum production by Impala Platinum (Implats) of some 180,000 ounces is further evidence that the South African sector is finally responding to market conditions, although analysts still wonder if the reductions in output will go deep or far enough.
According to a report by the World Platinum Investment Council (WIPC), an organisation created to promote platinum usage and improve market transparency, capital tightness among producers could see output fall by some 600,000 ounces by 2016.
“Platinum production from South Africa declined by over 500,000 oz/year, or 11%, from 2008 to 2013,’ said Trevor Raymond, director of research at WPIC in a recent study. “Over the same period annual capital investment declined by more than 40% to R17bn a year in the sector,’ he said.
Capital investment in 2014 was R13bn and published capital investment for 2015 is R11bn. “Using the rate of capital expenditure alone as an indicator of likely future output, refined platinum output from South Africa will fall by an estimated 16% below the 2015 level in 2016,’ he added.
In addition to its R4bn book-building announcement, Implats’ said it would cut capital R1.3bn to about R4bn in its current 2016 financial year. And there is some agreement that output cuts are finally beginning to take shape.
“Producers have begun to cut production, cost and capex and to defer projects,’ said Christopher Nolan, an analyst for RMB Morgan Stanley. “We estimate about 300,000 to 700,000 platinum ounces are at risk over the next 12 to 24 months,’ he added. South Africa’s production base is about 4.2 million platinum ounces.
Another example was the recent decision of Royal Bafokeng Platinum (RBPlat) to delay capital spending on its Styldrift project which was to add 300,000 oz alone to its output – a doubling – until the market had revived. It is one of the first platinum companies to suggest that the current slump in the PGM market may extend well beyond 2015.
Said Andrew Byrne, an analyst for Barclays Capital: “Whilst these (RBPlat) announcements have limited impact on platinum production expectations for 2015-2017, it does mean that the medium-term supply-demand dynamics of platinum are tightening, with these decisions likely to see about 400,000 oz (5% of global supply) of production removed from forecasts’.
What’s interesting, however, is that whilst demand may be tapering over the next two years, the balancing side of the equation – the health of platinum supply – remains equally, if not more, difficult to anticipate.
Commenting on supply cuts, Nicholson said that they may not be in itself enough to tighten the market in the medium term.
There is uncertainty about the extent and duration of the downturn in auto and jewellery demand for platinum in the European market whilst there is also the danger of “broader secular concerns’ (not cyclical but permanent) in European diesel demand for autocatalysts, especially as there’s a move towards sourcing alternative technology.
Added to this is the question of the extent of above ground stocks of platinum, thought at the last count to total about 2.6 million oz. Steve Phiri, CEO of RBPlat, commented at his firm’s recent interim results presentation that stocks were “ticking up again’.
It should be no great surprise that the remainder of 2015 and 2016 should prove one opacity after another for the PGM; after all, this has been the case for the previous three years with major supply and demand shocks in each of 2012, 2013 and 2014 making it difficult for producers to call the market – an insight intriguingly observed by Barclays’ analyst Byrne.
The Marikana disaster in 2012 and associated strike curtailed some 500,000 oz in platinum supply which was followed in 2013 by a surprise demand for some one million ounces of platinum as exchange trade funds took hold.
There was also the build-up of 600,000 oz in inventories that helped platinum consumers sit out the 2014 strike in which some 1.4 million oz of supply was held-back.
For some, South Africa’s platinum industry restructuring just can’t come quickly enough, or may never come owing to government hostility to supply cuts and inevitable job losses.
Said Investec Securities in a recent note: “Given the current labour situation in South Africa we cannot see the industry being able to restructure, cut production and save itself. This is like watching a crash in slow motion with nothing that can be done to stop it’.
