Higher rand to quicken cuts in SA's platinum output

The platinum sector, which accounts for over 70% of global supply, has already slashed jobs and spending in a bid to survive the tough operating environment.

Impala Platinum Mine. Picture: Implats.co.za.

LONDON - The world’s top platinum producers operating in South Africa are under pressure from the higher rand which, along with lacklustre metal prices, could force companies to cut output faster than before.

The South African platinum sector, which accounts for over 70% of global supply, has already slashed jobs and spending in a bid to survive the tough operating environment.

But a 40% slide in platinum prices over the last five years demands further cuts, which could be delivered by a stronger rand, industry insiders say.

The election of South African President Cyril Ramaphosa in December helped push the South African currency to a three-year high against the dollar in February. It has since pulled back, but remains well above its 2016 record high.

“Almost without question we are going to see more rationalisation and more closure at this level,” Northam Platinum Chief Executive Paul Dunne told Reuters, referring to the rand.

A stronger local currency, while indicating upbeat economic sentiment that could benefit the platinum producers in the longer run, spells trouble in the near term.

As producers pay the majority of their expenses in rand and receive revenue in dollars, costs may balloon. They also have to contend with rising wage bills and higher power costs.

With metal prices on a downward trajectory, investors have punished mining firms, eroding share prices and forcing some such as Lonmin and Impala Platinum to tap investors for cash to stay afloat.

Demand for platinum, used in vehicle emissions-cleaning catalytic converters, has been hurt by lower diesel car sales and a drop in Chinese jewellery buying.

Supply has not fallen to compensate. Despite deep capital expenditure cuts that resulted in thousands of layoffs, annual South African platinum production still hovers at around 4.3 million ounces seen in 2013.

This is to the dismay of investors who had hoped for a further shakeout in production to lift prices.

Strength in the rand could change that. Johnson Matthey said in a report this week that the currency move has increased the possibility of further shaft closures, particularly at older mines on the western Bushveld.

“A strong rand brings the inevitable layoffs and closures forward more quickly,” Cadiz Corporate Solutions mining director Peter Major said.

The platinum industry has cut almost 28,000 jobs, or 14% of its workforce, since peak employment in 2008.

Job cuts are a sensitive issue in South Africa’s mining industry, a major employer in a country where unemployment runs at around 28%.

“Most of your top PGM producers are taking real strain and therefore the willingness to consider measures to improve operating efficiencies are right at the top of everybody’s agenda,” said Neal Froneman, chief executive of precious metals miner Sibanye-Stillwater.