Government should sit back and enjoy the platinum windfall
SA is probably headed towards a resource windfall. It’s a welcome and much-needed boost to fiscal revenue. But what’s required to ensure the country can benefit from it? First, we need to look at the market dynamics that underpin the surge.
In 2021 sales from the platinum group metals (PGM) sector amounted to R347bn, of which 93% was exported, positioning the sector as a key generator of foreign exchange. PGM sales rivalled the sum of the next three largest commodities — coal, iron ore and gold.
This came at a time when platinum supply was in surplus for two consecutive years. This year, that trend is set to turn as the global market is expected to see a deficit of about 556,000 ounces. This is a result of supply outpacing demand — a 3% increase in total supply and a 24% increase in global demand,
The demand is partially driven by platinum becoming leveraged as a substitute for palladium. It is also an input for emission-control catalytic converters, and a part of hydrogen fuel-cell powered vehicles.
The price trajectory speaks for itself. In 2021 the average closing price for palladium was $2,388/ounce, before falling to $2,061 in 2022. Palladium is averaging just $1,526 this year.
Since the surge in 2021 as economies rallied from the Covid-19 pandemic, platinum prices have contracted 8.5% compared to palladium’s 56%. This shift bodes well for SA — in volume, SA produces 75% more platinum than palladium.
The shifting paradigm is likely to create a price surge — 2023 is the first year in many that there will be a global deficit, and some forecasts suggest this could increase by up to 1.5-million ounces in 2024 — a tripling of this year’s deficit.
Beyond supply and demand dynamics, geopolitics also works in SA’s favour. Sanctions have a two-fold effect: they inhibit imports of key mining technologies, and they reduce buyers’ appetite to engage.
Russia is the second biggest producer of platinum. Though there is a considerable gap between SA and Russian production levels, the loss of Russian platinum could boost demand for SA’s platinum by a further 15%.
SA’s palladium sector has substantial scope to strengthen its dominance. The country produces 80,000 metric tonnes of palladium a year compared to Russia’s 74,000 metric tonnes. While SA is unlikely to be able to meet the deficit caused by Russia’s pariah status, it does offer a clear opportunity to scale up production.
Gold is another sector that could generate a windfall. The metal’s price has averaged $1,872/oz so far this year and as a safe haven asset amid market volatility seems likely to surpass the record of $1,874/oz achieved in 2022. In recent days prices have surged as financial sector confidence wavered after the collapse of Silicon Valley Bank.
So, windfalls could be around the corner and resource companies have much to celebrate. But what does the government need to do (or not do)? As tempting as it may be for it to revise its policies to up its share, it should not. Stable policy is the cornerstone of a successful mining economy. SA ranked 75 out of 84 jurisdictions in the 2021 Fraser investment attractiveness index, in the company of Zimbabwe, the Democratic Republic of the Congo and Venezuela. Turning this around requires avoiding impulsive policy changes.
Globally, we know that having a rich deposit of high-demand commodities isn’t enough to retain investors. Zambia saw divestment despite having rich deposits of copper, one of the most sought-after commodities, after the country raised its royalty rates for the 10th time in 16 years in 2019 and began imposing new levies to capture a greater share of the windfall.
Keeping stable policy offers a range of benefits: it enables firms to have the confidence and financial capacity to make production-expanding investments in terms of mine expansion and technological investment; it attracts new investment; and it encourages firms to retain existing investment, a challenge SA has faced in recent years.
SA needs to adopt countercyclical policies — increasing fiscal revenue does not justify increased spending per se, particularly inefficient bailouts of state-owned enterprises. Rather, SA needs to build savings to withstand the bust phase of the inevitable boom-and-bust cycle. The country benefited enormously from the boom from the mid-2000s to early 2010s, but failed to transform that into long-term growth.
I’m cautiously optimistic for what could be an economic lifeline for the next few years, with an understanding of the inherent vulnerabilities of the sector given that we don’t have a say in the global demand dynamic.