The South African sector has some very tough questions to ask itself as what exactly its platinum sector is going to look like.
It was going to take something truly awful to tear platinum traders' eyes away from the ever-changing patterns of the European crisis and the poor demand outlook for the metal it has engendered. But, not even the most ardent bulls, could have imagined the scenes at Lonmin's Marikana operation near Rustenburg or the ever increasing death toll.
But, while terrible, the violence has served to bring the supply issues currently facing the South African platinum sector into sharp relief. And, as a result, prices are finally moving. Platinum prices rose around $40 an ounce yesterday and have continued that move today. That is not to say that the problems facing the sector were being kept a secret. It is just that many people were too focused on the demand side of the equation to worry that much about supply.
One just has to look at the statements from Aquarius Platinum CEO, Stuart Murray, and Platfields CEO, Bongani Mbindwane to get a sense of how dire things are.
So much so that Aquarius Platinum has halted production at its Everest and Marikana operations; Anglo American Platinum CEO Neville Nicolau resigned "to pursue other interests" one day after the group said first-half profit fell 78%, while Lonmin, before the violence caused it to halt all of its platinum belt operations, announced that it had cut spending for the rest of the year by $20 million to $430 million. And, more importantly it had slashed capex plans for its 2013 and 2014 financial years to $250 million - just enough, effectively, to sustain current operations.
Indeed, Christy Filen, in these pages last month (see South Africa's platinum pain deepens) wrote that "of the country's 26 mines, eleven were found to be operating at a loss with a further four marginal at best.
In other words, this time courtesy of Standard Bank, from its Commodities Daily note out yesterday, "With a PGM basket price of ZAR8,990/PGM oz, we estimate that 14.6% of platinum production (690K oz) is at risk (based purely on negative margins), as well as 13.15% palladium production (353K oz) and 12.9% rhodium production (12.85% oz)."
The bank is quick to add that, given the structure of the South African sector, not all of these ounces will be lost. But, it says, "it is indicative of the price pressures platinum producers are experiencing."
How did it get so bad?
Over the past four years, or to put it another way, since the start of the global financial crisis, platinum prices have struggled to recover from a massive sell off that happened between March and November of 2008.
As can be seen from the graph above, platinum prices peaked around $2,133 in March of 2008 then fell as low as $840 an ounce before starting the long march back up. Much of the reason for this is that a large portion of platinum demand comes from the metals use as a catalyst in car exhausts. And, since 2008 the auto market in Europe in particular has been fairly weak. It is important to note here that the European car market is dominated by diesel-fuelled cars which still, in the main, use platinum auto catalysts. This is in comparison to gasoline-fuelled cars(which dominate the markets in countries such China and the US) that mainly use palladium auto catalysts .
The weakness in demand from Europe's car industry and other sectors, such as jewellery has weighed on prices, especially because there hasn't been, until recently a concomitant pullback in production.
As a result producers have been forced to take a hit, one made worse by dramatic increases in costs both in terms of labour and raw materials.
So what happens now?
According to UBS's analyst Edel Tully writing from 'London, " While lost platinum production so far does little to put a dent to our estimated surplus of 210koz, the risk is that the situation starts to infect other major operations in South Africa, thus softening the surplus balance effect."
She adds, "However, if the unrest becomes materially worse from here, there is also the potential of positive government intervention easing fears which would in turn dampen platinum's newly-found strength. But there are doubts as to whether the government will be able to respond quickly enough, particularly given the politics surrounding the ANC leadership elections in December."
Standard Bank, while still negative on the demand side of the equation, said in a note out yesterday, that because of where current prices still sit, it sees "little value in being short platinum" now.
"We maintain that SA platinum production will be 567K oz less in 2012 than in 2011 (we expect SA to produce 4,288K oz in 2012), resulting in an actual deficit market this year. However, we expect the market to have returned to a surplus in 2013," it says.
And it adds, "With lower production volumes because of strikes, the cost of producing an ounce of platinum is also rising, putting further pressures on producers."
All in all, while prices may have spiked briefly and could continue to rise if the unrest at Lonmin continues, it is unlikely to be as a net benefit for the country.
Longer term, the South African sector has some very tough questions to ask itself as what exactly its platinum sector is going to look like.
, the root causes of the dire straits in which the sector finds itself remain and, things are likely to get much tougher before they start to improve.