Three-quarters of the world's platinum is mined in South Africa, but the mining industry there is beset with problems. Last month's tragedy at Lonmin's Marikana mine - where 34 miners striking over wage issues were shot and killed by police - shocked both South Africa and rest of the world, highlighting the intense campaigns being fought there by rival unions and political parties. The shootings, the bloodiest security incident in the country since apartheid ended 18 years ago, have sparked labour unrest at several other mines and have caused several temporary mine closures.
Despite a recent deal signed between Lonmin and its workers to raise wages, other South African platinum miners continue to be dogged by negative news reports and striking employees - now demanding that they, too, get higher salaries. The irony is that all the unrest has had quite a strong positive effect on the platinum price itself, which in turn has helped buoy depressed platinum miners' shares a little as well as margins. Investors, in turn, have piled into platinum-backed exchange traded funds (ETFs) on the back of the production disruptions and the news of further rounds of quantitative easing in the US.
Still, there are plenty of other reasons to be bearish on South African platinum miners' shares. Unreliable power sources, soaring electricity and water prices, double-digit wage inflation, community unrest, dangerous working conditions, government-ordered work stoppages caused by safety concerns, and adverse exchange rates, to name a few. All these have pushed operating costs for miners way up, and are likely to continue doing so in the future.
Worse still, the market for platinum is likely to remain in surplus this year and possibly next. The mine shutdowns should mitigate some of the excess production - but not enough. Consumption of the metal aside from ETFs also looks set to fall, with lower than expected jewellery demand and a weak - although slightly improving - European automobile market (a major consumer of platinum through catalytic converters). More moderate purchasing in industrial applications has led catalytic converter maker Johnson Matthey to forecast a fall in worldwide gross demand for platinum in 2012, while the European debt crisis remains a major downside risk for the market.
As the outspoken chief executive of Randgold, Mark Bristow - a South African himself - told Investors Chronicle recently in an exclusive interview: "[The platinum industry in South Africa] is not viable… And it's a cartel - it should be able to easily manage itself. The irony is that the Zimbabwe platinum assets are starting to look quite nice."
The price of platinum has historically tracked the gold price, yet the metals' correlation reversed sharply late last year and is now more intricately driven by both supply and demand. We'd advise avoiding platinum producers generally - in the months prior to Lonmin's latest woes, four other listed miners were forced to halt construction or suspend operations at platinum mines in South Africa, citing rising costs and a poor outlook for prices.
They're unlikely to be the last. The most vulnerable platinum stock left in the UK market has to be Lonmin, already plagued by operational problems and a habitual misser of targets - yet still committed to more than $1bn of capital expenditure over the next five years. We advised selling Lonmin shares at 701p in July and continue to do so.
