Unintended Consequences

Published 11 years ago

“It’s an ill wind that blows nobody any good,” runs the proverb and the accuracy of that callous observation can be seen in the current labor mayhem trashing South Africa’s platinum sector.

Through their actions, the illegally-striking workers are doing exactly what is needed to bring a positive correction to the fundamentals of the platinum business.

On the downside, they are likely to pay a heavy price in permanently lost jobs because of it. In fact, all South Africans will suffer because of the knock-on consequences to the nation such as the recent cut in the country’s sovereign credit rating. That hits Eskom’s ability to raise funds which affects every electricity consumer in terms of future higher power tariffs and possible future power shortages.


The platinum price collapsed from around $1,750 in March because it became clear the global slowdown combined with the previous expansion in South African supply meant there was a surplus of metal in the markets, which analysts estimated at up to 500,000oz.

Economics 101 lays out a simple solution: cut the supply and the price will recover—but the South African producers would not, or could not,

do so.

Would not—because all miners are optimists at heart and believe the good times will return sooner rather than later. Therefore they did not want to incur the costs of closing shafts only to re-open them in a year’s time while at the same time handing commercial benefits to competitors who did not cut back.


Could not—because the platinum miners are under extreme political pressure from government to preserve jobs and that pressure can be applied in a variety of unpleasant ways.

The strikers have now done management’s work for it. Estimates of the amount of platinum production that could be lost this year, so far, sit around 300,000oz.

Surprise, surprise—the platinum price has jumped more than 20% since the beginning of August from around $1,400/oz to around $1,725 in early October.

The platinum industry’s marginal projects—some of which should probably never have been started in the first place because they are only viable at sky-high prices—are now being squeezed out of business.


That’s likely to be permanent. Labor accounts for around 50% of total cash operating costs so steep hikes in wages have a huge impact on the financial viability of the mines.

What’s more, foreign investors—who put up the money previously for all the new platinum projects—are seriously unimpressed.

“The government needs to take control of the situation and solidify practice and protocol with regard to wage negotiations before the nation’s mining sector becomes uninvestable,” says Fairfax Securities analyst John Meyer.

Impala Platinum marketing executive Derek Engelbrecht recently stated, “The days of South Africa as a five million ounce platinum producer are long gone. The country could settle at output of between 4.25 million oz and 4.5 million oz. The challenges being thrown at the industry make the attainment of 5 million oz very, very difficult.”


Remember—this was the sector of South Africa’s mining industry with the best growth prospects. Not only has that growth been, at best, considerably delayed but there will be a heavy price in lost jobs from the present work force.

Estimates on the jobs that could be lost range from 10,000 to 30,000. That results from a trend that has been obvious on the gold mines for the past 20 years. Time and time again, the unions have pushed for, and received, annual pay increases running well above ruling domestic inflation rates and the mines have coped by cutting out the higher-cost production assets that were no longer viable.

The one ray of light, is the agreement just reached between Gold Fields and the National Union of Mineworkers (NUM) over the new operating model for the mechanized South Deep mine.

I find it significant that Gold Fields management, after exhausting normal negotiation procedures, took a hard line stance issuing a Section 189 notice putting all the jobs at this mine on the line.


Being a nice guy clearly does not work. In December, Kumba Iron Ore paid out R345,000 ($39,800), after tax, to each of more than 6,000 of its employees, in terms of a free five-year share incentive scheme.

As of early October production from Kumba’s Sishen mine was suspended after 300 workers went on strike and blocked access to the pit.