Sunday, June 29, 2014

South Africa Miners strike ends, what now for PGM prices

The South African PGM miners strike ended last week:

South Africa's main platinum mining union said Monday that its members agreed to a wage settlement that will end a five-month strike, the country's longest, that has left the industry's labor ties in tatters.

The wage agreement falls short of the union demand to nearly triple all workers' entry-level salaries, but it will increase annual pay by around 1,000 rand ($94) a month for a three-year period, Association of Mineworkers and Construction Union President Joseph Mathunjwa told several thousand striking workers gathered in a stadium in Rustenburg, northwest of Johannesburg and in the heart of the platinum mining region. He said the agreement will be for three years starting retroactively from 2013, instead of the five the companies had wanted. Mr. Mathunjwa told the crowd that the union plans to sign the agreement on Tuesday and that mine workers can begin returning to work starting Wednesday.

The price of platinum and palladium initially moved lower on the news but then soon recovered. I think the union will find this to be a regrettable victory in the long term. The reason the mining companies let this drag out so long was that the price of the metals is below their all in sustaining costs. Which means that restructuring, layoffs, and shaft closings are on the table. The article linked to said as much.

The platinum industry has tried to reduce costs, cut labor and scale back some operations over the past year. The Chamber of Mines industry body said more than half of platinum operations in the country weren't making money even before the strike started. The AMCU has argued that the companies should be able to pay their workers better given the large paychecks and bonuses platinum company managers receive.

If half the mines were not making money before wages increased there are even more incentives to restructure after these wages increases. This is all happening in the face of supply/demand deficits in these metals.

As the future of the bulk of South Africa’s platinum group metals (PGM) output hangs in the balance on the back of a protracted strike weighing on the nation’s three largest producers, palladium and platinum deficits were likely to reach two-million ounces and 1.2-million ounces respectively this year, Standard Bank commodities head Walter de Wet told Mining Weekly Online.

This was an uptick on Standard Bank’s April forecast of a 815 000 oz platinum supply deficit for 2014 as a whole – a volume that could have been down to 300 000 oz had the strikes not occurred – and a palladium deficit of more than 1.5-million ounces.

Palladium would close 2015 with a 1.3-million-ounce deficit and 2016 with a 1.8-million-ounce deficit, de Wet said.

Further, the palladium price was likely to breach the $900/oz mark sooner than 2016, as previously forecast by the bank earlier this year, owing to rising palladium exchange-traded funds and supply constraints as the crippling strike continued with only a tentative end in sight.

I maintain my position in Sylvania Platinum as a way to play the increased likelihood of continuing and worsening PGM deficits which should lead to higher prices and higher cashflows/profits for Sylvania.

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