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Limping along - The normal course of economics has broken down in the platinum industry

18/06/2013

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

It has been almost four months since The Value Perspective last visited the unhappy world of platinum mining but, in that time, matters have not improved much for the sector in general and lonmin in particular. Reconciling the current low platinum price with the difficulty of cutting labour costs is proving especially problematic.

Extracting platinum from the ground requires a great deal of manual labour because the mines are often too deep underground to allow a lot of machinery to be used. In the normal course of economics, one way mining companies should be able to react to low commodity prices is by cutting labour costs, by reducing staff numbers and / or rates of pay, but lonmin and others have run into trouble here since the mining industry in South Africa, which produces three-quarters of the world’s platinum, is heavily unionised and highly politically sensitive.

We have covered the unfortunate series of events at lonmin’s Marikana mine in articles such as lonmin’s situation and, while the company announced last month it had since patched up relations with the various unions represented at the mine, South African media reports suggest a new strike is looming.

Issues such as this now mean a third of all platinum mines are operating below the marginal cost of production – one of the reasons, incidentally, for lonmin’s $817m (£525m) rights issue last December – and, with mining companies prevented by the unions from cutting costs and by government from shutting mines to dial down supply, the chances of things getting any better in the short term seem slim.

Platinum may be an incredibly valuable commodity from an industrial perspective but the fact the majority of it is in one place and, furthermore, in a place where politics and other external influences are hampering the normal course of economics, means the industry at present can do little more than limp along.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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