Labour, Eskom to load 10% on Pt costs

[] — I had to respond to a recent e-mail which I think is from a US-based shareholder of platinum junior stocks(s), possibly Anooraq Resources. Here was the question: “A double whammy of strong rand and weak PGM [platinum group metal] prices will put the SA metals industry into Detroit mode. Do you agree?’

Likening South Africa’s platinum group metal sector to the US automaking market is perhaps taking the point too far, but the recent strengthening of the rand maybe a point of concern to South Africa’s exporters. Or is it?

Well it seems there’s nothing yet to fear from the rand/dollar in particular because the dollar price of platinum has appreciated such that it’s compensated for the improvement in the improved value of the rand.

By way of proof, the platinum group metal basket (3E) is virtually unchanged quarter-on-quarter this year. The second quarter produced an average basket price of R246,286/kg against R251,500/kg in the first. Throughout that time, the rand has been strengthening against the dollar reaching a 10-month high on Wednesday of R7,67.

My US correspondent asked whether the SA Treasury could allow the rand to continue strengthening in this manner, but it’s really market forces at work. The South African economy recorded a trade surplus – more exports than imports – for the first time in years in May suggesting the trade deficit in general was narrowing.

If that is happening, then its likely to rand could hold its ground or strengthen further although this is to perhaps unwisely discount how the dollar will behave. It has been weak lately.

The other question is what will happen to the platinum group metal basket? The general view is that an oversupply, or at best a balancing in supply/demand this year is the likelihood. A supply deficit is unlikely.

This is bad news for PGM stocks because there are other cost pressures South African miners will have to absorb – never mind the rand.

One is labour. A CPI +1 increase in the wage bill, currently being negotiated with unions, will mean a 11% or 12% increase in the wages. Since labour costs are abou 50% of total unit costs, this translates into a 6% increase in unit costs, effective from the third quarter.

Then there’s electricity costs. Eskom has been granted a near 32% increase in its tariffs, and more in the pipeline. Electricity is 7% of total unit costs so you can add another 2.5% or so to the cost base of the PGM companies. That’s a total unit cost increase of about 10% still to be absorbed this year.

Anglo Platinum is taking of improving efficiencies and taking some cost stresses out of the system. The group’s recent reputation is not built on thriftiness, but surely it’s that criteria that will surely be the litmus test by which the PGMs will be measured.

The JSE’s platinum mining index is 16% stronger this year although it fell precipitously towards the end of 2008. Nonetheless, the recovery in PGM equities may be overdone. Analysts aren’t expecting any fireworks from the sector in 2009, and it’ll be hard for the junior miners as well.