Platinum miners feeling the pinch

The fall in commodity prices has led to growing concerns in the mining industry in recent weeks. In large producing countries like South Africa, falling prices could result in mine shutdowns in the foreseeable future, with current price levels in the precious metals sector already putting some companies under pressure. This development is primarily based on rapidly rising costs in the mining sector. Most South African mining companies already require a gold price of $1,600 per troy ounce in order to operate profitably. Platinum markets could be rattled by the future supply situation, since around 75% of all global platinum deposits are located in South Africa.

The decline in platinum prices to a low of $1,500 per troy ounce has already put some of South Africa's mining companies under severe financial pressure. Since costs are rising rapidly, South African producers need an increase in the platinum price. Platinum is at its cheapest level relative to gold in two decades. Gold’s price premium over platinum recently reached as high as 12%. But what market observers call a “favorable price” is always relative and dependent on economic developments. If the gold price remains under sales pressure in the coming weeks, further declines in the other precious metals are likely – perhaps pushing the gold price premium to platinum even higher than 12%. Above all, growing fears of cascading defaults in Europe's banking system or the potential bankruptcy of member states of the European Union have crushed base metal prices in recent weeks. Platinum and palladium suffered from this situation as well since both precious metals are highly dependent on demand from end consumers in the automotive industry.

Should platinum's correction phase last for a longer period, with prices falling below $1,500 per ounce in the coming weeks, South African platinum mines will come under increasing financial pressure. Rising energy and labour costs are a particular problem, with strikes by disgruntled workers demanding higher wages a serious problem. Overloaded electricity networks are the reason for power supply cut offs, which are causing recurring production disruptions.

The depreciating value of the rand against the US dollar is however offering some support for South African mining companies. Despite precious metals' sharp decline in dollar prices, mining companies generate higher revenues in terms of South African rand, which is partially mitigating cost pressures among domestic operators. The entire industry hopes that economic activities will not significantly deteriorate further with the world slipping back into another recession, something that would pressure demand for certain metals and thus knock some of South Africa’s miners. However, potential production cuts and mining facility shutdowns mean that future supply bottlenecks could rattle platinum markets. In the long term this would help platinum prices to gain in value.