Anglo American Platinum mine at Rustenburg. Photo Credit:AFP/Getty Images/Stephane de Sakutin
Anglo American Platinum (Amplats), the world’s largest producer of the metal, has bowed to South African government and union pressure to scale back the restructuring plan it had proposed in January to turnaround last year’s losses, its first ever. The company will now cut 6,000 jobs — not the 14,000 (out of some 56,000) originally proposed — and keep open one of two mines it said it would close or sell.
After the deadly violence that struck South Africa’s mining industry last year, there was always going to be a political dimension to the reorganization that the business planners would not be able not ignore, any more than they could ignore the above-inflation wage rises they had to pay to settle the strikes. With the government facing an election in 2014 and restive mineworkers’ unions still vowing to oppose any job losses, the political dimension won’t go away.
Where that most hamstrings the company is in its efforts to fix the world platinum price. Platinum is used for emissions-capping catalytic converters in vehicles. Demand has been sluggish as the global economy has been sluggish. As the chart below shows, platinum prices have not regained their pre-2008 financial crisis highs, and have been drifting lower since 2011.
Amplats had originally wanted to cut its output by around 350,000 ounces a year, or 7% of world output, to underpin the price of the metal. If it is to keep its Khuseleka 1 mine open and preserve more jobs by idling fewer shifts, as it now says it will, it can’t reduce its output by much more 250,000 ounces a year. That is still equivalent to 4.5% of annual world production. And the company hopes it will be able to add back the other 100,000 ounces “in the medium term.”
Sufficient to return the company to profitability? Perhaps, but not convincingly so. Last year’s strikes cost Amplats 306,000 ounces of production, more than it is now proposing to cut, and that didn’t cause a permanent revival in platinum prices. In January prices spiked no higher than $1,700 an ounce on Amplats’ original restructuring plans; they were at $1,500 an ounce earlier this week as investors digested the likely scale of the revised plan.
Once the revised plan was announced, investors marked down shares in Amplats and its parent, Anglo American, by nearly 5%, fearing the cuts could be watered down even more. At this point, pricing power lies more in the hands of South Africa’s government and unions than it does in those of the company’s managers.
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