Dilemma for platinum mines in South Africa

The price of platinum could come under further pressure if platinum producers in South Africa wait even longer to close loss-making mines, according to South African asset manager Momentum Asset Management and French bank Natixis. According to the World Platinum Investment Council (WPIC), South Africa's total platinum production may rise by 30% this year from a year ago, when strikes crippled production at many mines.

About 70% of global platinum production comes from South Africa, but the fall in the price of platinum means that more than three-quarters of mines can no longer produce profitably, Momentum asset manager Simon Hudson-Peacock told  Bloomberg. By bringing even more platinum to the market, they are worsening the outlook for platinum, the precious metal that has already fallen 45% since the beginning of 2011 . As a result, stocks remain at the same level and the price can remain under pressure for even longer.

"I don't know where the platinum price will go, but the fact is that most of the mines are under water. The industry as a whole needs to reduce production", according to the asset manager of Momentum Asset Management. According to him, four mines owned by Anglo America Platinum Ltd. would have to close, as well as Lonmin Plc's Marikana platinum mine. These five mines together accounted for 15% of the country's total platinum production last year , despite the fact that these mines were hit hard by last year's strikes.

Social pressure

The platinum mines in South Africa are under public pressure to continue producing, even if it no longer provides any added value for shareholders. The mines are a major source of employment for the South African economy and if some close their doors will cost thousands to tens of thousands of workers their jobs. And that while one in four adults in the country is already unable to find work.

In the four platinum mines of Anglo America Platinum employs a total of 22,981 people, while Lonmin has 28,513 miners on its payroll, according to its annual report. It is therefore not an easy decision to take these mines out of production, given the social impact on society.

"We are in a situation where more and more South African platinum mines are producing below cost . We are somewhat surprised that we do not see more pain in the sector and that more mines have not already closed their doors," as stated commodities analyst Nic Brown of Natixis. According to him, the outlook for platinum is unfavourable, because technological developments mean that less and less platinum is needed for catalytic converters in cars.