THE platinum sector will remain under pressure and more production cuts and job losses should be expected, said economists and analysts this week.
Following a year-long review of its operations, Anglo American Platinum (Amplats), the world's biggest miner of the metal, plans to shut four shafts in Rustenburg, sell its Union mine, cut capital expenditure by 25% and production by 20%, or 400000 ounces, and retrench 14000 people as it fights for financial sustainability.
Amplats has to take "drastic and significant action to save the company", CEO Chris Griffith said.
Platinum miners face spiralling costs, safety stoppages and weak demand, particularly from vehicle manufacturers in the European Union, the key buyer.
New-car registrations in Europe fell 8.2% in 2012, the biggest year-on-year decline in 20 years. Morgan Stanley expects volumes to drop another 4% this year before perhaps recovering 2%-3% in 2014.
A platinum price of more than $1,900 (R16,866) an ounce is required, from $1678/oz at present, for Amplats to meet its cost of capital, Morgan Stanley said in a note to clients. This would require a "substantial recovery in demand" from the European car sector, it said.
While platinum prices rose 2.8% this week following the Amplats announcement, a sustained increase in the platinum price may require further production cuts from other producers, BMO Capital Markets said.
If Amplats succeeds with its restructuring plans "in the face of government and union opposition, we would expect other operators to follow suit", ratings agency Fitch said in a statement. Nearly half of platinum production in South Africa, the dominant global producer, is running at loss-making levels.
Extended wildcat strikes last year exacerbated platinum producers' financial woes, with Amplats warning investors on Monday that it expects a headline loss per share of as much as R6.28 for the year ended December, from a profit of R13.65 last year.
In 2010, the company had to raise R12.5bn from shareholders, cut about 19,000 jobs, halt its dividend to pay off debt and cut costs in the aftermath of the global financial crisis.
Emma Townshend, analyst at Renaissance Capital, said in a note the planned restructuring at Amplats was "turning back the clock on a decade of inefficient and ineffective management strategy". The move is expected to realise cost savings of R3.8bn a year by 2015.
Griffith said the restructuring is needed because it is "clear that this is a company and an industry in crisis".
While the seven-week strike at the end of 2012 contributed to its worsening financial position, the strikes were not the reason for the proposed changes and is not punishment for the strike action, he said.
An analysis of Amplats financial statements over the past five years shows return on equity fell from nearly 44% in 2007 to 6.5% in 2011. Impala, the number two producer, saw returns fall from 31% in 2007 to 8.5% in 2012, while Lonmin, the third-biggest, saw returns plummet from 21% in 2007 to -15% in 2012. Amplats' 2012 results will be released on February 4.
With returns for platinum investors barely beating the 5% offered by a simple Capitec savings account, it is clear that action is needed to save the industry. The JSE's platinum index has dropped 40% since 2006, compared with a 43% rise in the All Share index and a 112% rise in the retail index.
From 2007 to 2012, the cost per unit of platinum production increased by 18% a year, said Roger Baxter, chief economist at the Chamber of Mines.
* This article was first published in Sunday Times: Business Times