ETF Trends
ETF Trends

The geographical concentration of platinum and palladium in areas known for their political instability, unreliable infrastructure and labour problems has traditionally exposed production to significant disruptions, subjecting prices and producers’ margins to substantial fluctuations over time.

The recent strike action at South African platinum mines has lifted the platinum price, sending it well past $1,500 to its highest level since early May. Recent events highlight the vulnerability of the PGM industry to labor unrest and raises questions about the sustainability of PGM production in the longer term.

South Africa has historically played a central role in determining market sentiment towards platinum and palladium. The country holds the biggest proportion of the world’s platinum and palladium resources, which are mainly located in the Bushveld Igneous Complex (BIC). This deposit is estimated to enclose about 75% of the world’s platinum resources and 50% of palladium’s total resources. The complex is jointly owned by mainly three companies, Anglo Platinum, Impala Platinum and Lonmin, and currently accounts for 75% and 35% of global annual production of platinum and palladium respectively.

Supply Disruptions in South Africa

Given the geographical concentration of platinum supply, issues such as government intervention, geopolitical instability, unreliable infrastructure and social tensions in South Africa have the potential to substantially disrupt production for prolonged amounts of time, in turn significantly impacting prices as we are currently observing.

The recent strike action at Lonmin’s Marikana mine has lifted the platinum price, which hit a three and a half month high yesterday. Recent events highlight the vulnerability of the PGM industry to labour unrest and raises questions about the sustainability of PGM production in the longer term. Lonmin estimated a loss of at least 50,000oz in production as a consequence of the rock drill operators’ strike in which 44 workers were killed last week. Lonmin accounts for over 10% of global supply, so any contagion to other large miners in South Africa is likely to continue to have a significant impact on the price of platinum because of reduced supply.

A similar situation occurred earlier this year when striking workers halted platinum production at another major South African platinum miner, Impala Platinum. The strike cost the company about 120,000 ounces, equivalent to about 1.9% of 2011 global platinum supply3, and prompted a strong reaction in prices. Platinum jumped 13% and palladium 12% during the strike action.

Safety stoppages, strikes, labor management difficulties, geopolitical instability, skills and power shortages are making operating in emerging market mines extremely difficult and costly. Platinum is one of the most labor-intensive metals to extract.

Profitability at PGM mines has been increasingly threatened by decreasing production and rising mine unit costs in the past years. The low price levels of platinum and palladium are pushing producers to place their operations on care and maintenance as uneconomical. Aquarius Platinum announced the closure of its Marikana and Everest mines in June. This is equivalent to around 27,400 platinum group metal ounces in lost production (equivalent to 0.4% of global supply in 2011) for the remaining six months of 2012. South African PGM mine production was down 21% in the first six months of 2012 compared to the six five months of 2011, contributing to a tightening in supply.

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