Exorbitant wage demands likely to continue

[miningmx.com] – STRIKES in South Africa’s mining sector, like Highveld thunderstorms, used to be seasonal. Now they are a perennial feature of business as the shape of the country’s organised labour continues to change, and rapidly.

The latest twist is the reported weakness of the Association of Mineworkers & Construction Union (AMCU), the union that usurped the National Union of Mineworkers (NUM) in the platinum sector last year and now, so the rumours go, is in the process of being usurped itself.

Given its ideologically-driven and somewhat recalcitrant leadership, the decline of AMCU could be regarded as a positive development for investors.

However, that would be to ignore the threat of what may replace AMCU. There are yet more radical labour organisations waiting in the wings such as the Workers and Socialist Party (WASP) and Julius Malema’s Economic Freedom Fighters (EFF).

A return to worker committees is another possible development if AMCU’s grip on some 60% of the platinum workforce weakens.

According to one Johannesburg investment analyst, worker committees are hard for management to tackle because of their inherent lack of structure. Leaders change as do demands and it’s, therefore, time consuming for management.

In the meantime, there are wage negotiations to be had.

At the time of writing, the AMCU was still attempting to lever the country’s platinum and gold mines into awarding a R12,500 per month basic salary for entry-level workers and upwards. If accepted, this would be equal to a 40% increase and is clearly far from the 8% to 9% offer set down by the companies.

Johan Theron, head of corporate affairs for Impala Platinum (Implats) thinks demands of this scale will continue, and that the days of inflation-related salary increases are over. The effect will be to pressure management in medium-term restructuring.

“We will have a much smaller platinum industry in the future. A lot of the marginal mines have closed. We will see what else will fall over,’ says Theron.

Higher than budgeted wage increases is therefore net positive for the platinum price, a view shared by Macquarie Research in a recent note.

“We remain of the view that these events are price-positive more in the medium-term as they increase the cost base of the industry and reduce investment in future productive capacity,’ it said.

Ultimately, this will encourage the platinum price which is also being assisted by more signs of green shoots. In fact, it’s the slow but sure recovery of developed markets that is hammering the rand so hard as investors redeploy their funds by withdrawing from emerging markets.

The weakness in the rand is not thought to be strike-related – which is good news for the mining sector – but hitched to more fundamental issues such as flight of capital away from emerging markets as developed economies start to improve.

A weaker rand is a short-term trigger for mining companies, and if developed markets are starting to recover, that means the manufacture of autocatalysts using platinum will also improve which is positive for mining firms.

It’s perhaps this thinking that is behind the popularity of platinum-backed ETFs. Holders of these securities would have enjoyed the recent rally in the platinum price, up about $70 per ounce until January 21 when it fell back to about $1,140/oz, a $30/oz decline.

According to Ole Hansen, however, head of commodity strategy at Saxo Bank, the ratio between platinum and gold prices has reversed from a 15% premium in favour of gold to a 15% premium for platinum – a relationship that is likely to stay.

As he result, he concludes; “… any relative weakness in platinum still looks like a good entry point into the ratio considering the diverging prospect now being expected for the two metals’.