IN RESPONSE to promises that they would always be good, Mary Poppins chided her charges with the term "pie-crust promise". This was a promise that was easily made and easily broken; a promise that had no purpose other than the immediate goal of easing the current situation and making those involved feel good.
What does this have to do with platinum? Well, at the Brics (Brazil, Russia, India, China and South Africa) summit in Durban last week, South Africa’s mineral resources minister and her Russian counterpart entered into an agreement relating to their countries’ respective production of platinum and palladium. Together, the countries control about 80% of the global reserves of these two metals. So, at first glance, the idea of a cartel looks like a good one, as reflected by the Russian minister, who evidently commented: "It can be called an Opec (Association of the Petroleum Exporting Countries)". South Africa’s Susan Shabangu commented more enigmatically, saying: "Without creating a cartel … we want to influence the markets".
Forming a cartel is more than just controlling access to a resource. Any first-year economics student will be able to tell you that a successful cartel has to fulfil at least five criteria. The first is control of access through a limited number of suppliers. With 80% of the global supply under the soil of the two countries, we meet that condition.
The second condition is that there has to be agreement between the members of the cartel. History is replete with examples of cartels that have ended in the gutter as a result of conflict between the members. The third condition is that the agreement must be formal. It seems the countries have reached some agreement, given that they have signed a framework accord to discuss future action.
The fourth and fifth conditions are more problematic and relate to the product itself. The fourth condition is that the product must be demand inelastic. This means that no matter what the price, the demand for the product will remain relatively constant.
The fifth and final condition must be that there is no suitable replacement for the product. If there was a suitable replacement, as the price increased, buyers would simply choose the competing product. It is these last two conditions that raise issues that demand further investigation. Platinum group metals (PGMs) are to some extent demand inelastic, and supply is limited. The metals are generally difficult to mine — there was platinum shortfall last year of about 400,000 ounces and a shortfall of double that of palladium. But in spite of this shortfall, the price did not shoot through the roof as it should have for a demand-inelastic resource. Why? Because these was an alternative source of supply. Platinum and palladium are readily recyclable, supplying 20%-25% of global demand for the metals. The tightly controlled recycling of catalytic converters is a profitable and reliable source of platinum and palladium, with recyclers often hoarding stock until they feel the price is right.
This industry lies outside the control of Russia and South Africa and the existence of this source starts affecting the first condition for successful cartels of limiting the number of suppliers. In 2011 and last year, the recycling industry supplied the equivalent of 90% of South Africa’s contribution to the global supply in the same two years.
And what of a suitable replacement? Given that platinum and palladium are such rare metals, there has always been a tendency to minimise their use in applications. Some industries, such as the electronics and automotive industries, continue to use the metal in large quantities, but in both these cases the search is on to reduce the amount of PGMs in use, and for finding alternatives. After Marikana, which resulted in a significant rise in the platinum price in anticipation of a shortage, industries have continued to pursue the search for less expensive, more readily available alternatives.
Are suitable alternatives going to be available tomorrow? No, it is not likely, but statements about cartels and influencing markets are not going to slow the search for alternatives.
For short-term gains, reflected in the platinum price increases after the announcement, the framework agreement is a good thing.
For longer-term planning within the industry and for beneficiation within a sector facing difficult times, talk of cartels and influencing the market make it a pie-crust promise.
• Freer consults for Insight Strategies and lectures in international relations at the University of the Witwatersrand.