PGMs Seen Holding Up As South African Strike Ends; Restructuring Expected In Mine Sector

June 24, 2014

Johannesburg-S.A. (June 24)  Platinum group metals prices are likely to hold up in the medium to longer term despite the end of a five-month-long strike in the South African mining industry, analysts said.

They cite improving demand, particularly from the automotive sector. Mining companies also need to replenish inventories and it may take some time to ramp up operations.

Additionally, some analysts have said the deal that results in higher wages might also mean a restructuring in the industry – basically possible closure of some operations that are no longer profitable,  thus ultimately continuing to dent supplies.

The Association of Mineworkers and Construction Union began a strike against Anglo American Platinum, Impala Platinum and Lonmin on Jan. 23. All the companies issued announcements saying the labor action was settled. The walkout had idled some 40% of the world’s PGM mine production, with Citi Research estimating that some 1 million ounces of production were lost.

In the near term, metals prices may pull back further, perhaps to $1,400 an ounce for platinum and $800 for palladium, said Robin Bhar, metals analyst with Societe Generale.

“Longer term, I think that will provide a pretty solid base given that the 22-week-long strike would have impacted production levels and depleted above-ground stocks,” he said. “They need replenishment.”

Also, he said, demand is picking up, especially for palladium. The metals are used for catalytic converters, and this tends to favor palladium currently since it can be used in gasoline-powered vehicles that dominant the world’s two largest car markets of China and the U.S.

PGM prices are higher so far Tuesday, although one North American trader said a washout to the downside already occurred in these metals this month when it became apparent the union and companies were close to settling.
“At this point, it’s old news,” the trader said of the actual wage settlement. “Now, we’re seeing some fresh longs being added….A lot of people know now that it’s going to take months for all of these mines to get back on line and resume any kind of normalcy regarding output.”

Shortly before noon  EDT, July platinum was up $15 an ounce to $1,471.60 on the New York Mercantile Exchange,  while September palladium gained $5.55  to $828.20.

The outlook from Citi Research is for platinum to average $1,500 in the third quarter and $1,525 in the fourth. Palladium is seen averaging $830 in the third and $850 in the fourth. Both markets face large supply deficits this year, Citi added.

“We expect prices to remain supported in 2H’14 as miners seek to rebuild and buffer stocks depleted after such a lengthy production stoppage,” Citi said. “We would not expect the South African mines to return to full production until September at the earliest—the timing of which could bolster price volatility next quarter.”

Meanwhile, Citi and BMO Capital Markets issued reports suggesting that some restructuring of the South African PGM sector may occur.

BMO and Citi estimated that the three-year settlement could result in a total labor-cost increase of around 8.4% annually for each producer.

“There were also hints in the news releases (from producers) that some level of asset restructuring -- i.e., in BMO Research's view, possibly including shaft closures -- may be required given the cost increases in combination with the ongoing weakness in PGM prices,” BMO said.

Citi said that “we believe all three platinum majors will embark on some form of strategic realignment and restructuring. The companies did not agree to AMCU’s final demand of no restructuring over the next three years.”

The bank also suggested the strike ultimately may have hurt employees more than the companies since striking employees lost five months of wages to get an increase of only 1% to 2% above the  employers’ initial offers. To gain 200 rand more per month compared to what was initially offered, each employee had to sacrifice 9,790 rand per month, Citi said.

“This implies it will take employees 244 months – (or) 20 years -- to recoup lost salaries from the additional R200 (per month) achieved,” Citi calculated.


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