South Africa might just be the world’s greatest treasure chest of minerals; however, labour instability, ineffective governance and run-away power costs threaten the long-term viability of the precious metals industry there, Stuart Murray, Sylvania Platinum chairman, said at the LBMA Precious Metals Conference here.
“The gold industry is a perfect example – it’s taken a beating over the past 20 years. South Africa has slid from the biggest producer in the world to the sixth position in around 2005,” Murray said.
“South Africa should be a great place to mine. There is no such thing as remoteness there – you can land in Johannesburg and be in the world’s largest platinum belt in two hours by car. But unless we overcome some major obstacles the industry will collapse,” he added.
A top issue has been untenable fragmentation and infighting between trade unions such as the National Union of Mineworkers (NUM) and Association of Mineworkers and Construction Union (AMCU).
“The trade union movement is a licence to print money. They clip about two percent of every worker’s paycheque every month. The battle for membership has become a brutal and violent,” Murray added.
“But I would also argue that rampant labour costs we’ve seen over the last 20 years are due in part to management’s inability to rein in these unions. The result has been the decline of the gold industry and if we don’t take urgent action platinum mines will follow,” Murray added.
Worker productivity has also declined. It used to be that mine operators could stay open 320 days per year. But due to negotiations between management and unions, along with new government regulations, the number of productive shifts have fallen to about 230 days.
“That’s a significant re-rating of the South African industry. We now have a very European style low-hour work week. This is also has to change,” Murray said.
Meanwhile, the government under President Jacob Zuma as been an ineffective ally to the mining industry, Murray said.
“I get a sense that our government over the past decade has seen the industry as a never ending fund of money. But that is clearly no longer the case, we’re an industry that continues to be kicked. Hopefully, we won’t be kicked to death by the politicians,” Murray said.
“Communities have grown antagonistic to the mining industry, but this is largely due to unfulfilled expectations that were were spawned by the ruling party. There is this perception that mining is a golden goose but the reality is that big investment go in before returns come out,” he added.
For example, during the five month platinum mine strike this year, workers were promised raises of 100 percent by their unions and government officials but only ended up getting 12 percent, while losing five months of pay.
“Yes, mining is hard work, it’s dirty and in some cases it’s dangerous. But does that mean a mine worker pay should be twice what a nurse or police constable earns?” Murray said.
Meanwhile, in an non-labor related issue, South African miners now face electricity rates that are on a par with the US and Europe. State-owned utility Eskom is not only expensive but load shedding, power cuts and shortages for new businesses are all commonplace.
“Eskom has grossly mismanaged the power situation. But above all, we’re looking at a power price that has gone from 2 cents per kilowatt-hour to 8 cents in just a decade. For power intensive industries like gold and platinum mining, this has been a particularly harsh reality,” Murray said.
And finally, Murray said that the global platinum market as a whole is an “oversupplied mess”.
Platinum futures for January delivery on the New York Mercantile Exchange are now down trading at just $1,208.50 an ounce, which is about $300 below the February highs.
“Sure, equity market analysts continue to insist that there are 1-2 million [platinum] deficits out there. But that is really misleading because they put ETF in their calculations as demand. EFTs are not demand, they are stocks,” said Murray, who estimated that when ETF are taking out of the equation, there is more than one year’s worth of platinum for industrial consumption above ground.
“Platinum stocks have moved from the miners to financial instruments, like ETFs. As a result, platinum has been commoditised – miners are in a race to get to the bottom of the cost curve,” Murray said.
However, as a consequence, the miners have given up husbanding revenues, which has pushed down global market capitalisation down 500 billion rand since June 2008, which represents an 80 percent decline.
“The market does not need more metal – it needs less. The high marginal cost mines must close in order to bring fundamental supply and demand back into balance,” he concluded.
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