Amplats, for example, said it expects headline earnings for the six months through the end of June 30 to fall 65% to 75% over the same period last year. This means that it is expected to be between R6.7 billion and R9.4 billion against R26.7 billion in 2022.
That’s a sharp drop, and to put it in a broader perspective, last year’s earnings were also down from the year before. But 2021 witnessed record profits across the metals sector of the Platinum Group (PGM), Largely because of the standard prices.
In commodities, the laws of economic gravity state that what goes up must go down.
Amplats said the main reasons for expecting its earnings to be lower were lower US dollar prices for rhodium and palladium, which were 47% and 29% lower, respectively.
Furthermore, sales volumes from own production (excluding trading) were 12% lower compared to the first half of 2022. This reflected lower refined production as a result of the need to scale up the Polokwane smelter in January after it was rebuilt; Scheduled annual maintenance and asset integrity in processing operations; and the impact of Eskom’s load curtailment, which resulted in production delays of 66,400 ounces PGM,” the company said.
This points to the headwinds the sector has faced following its strong performances in 2020 and 2021.
Let’s start with the prices. In March/April of 2021, the price of rhodium reached record levels of around $30,000 an ounce, making it the most expensive precious metal in recorded history. Palladium at the time was approaching $3,000 an ounce. It was a combination that trickled down to the bottom line for PGM producers, especially those with decent exposure to rhodium and palladium.
Both are important catalysts for reducing emissions from gasoline engines, and in 2021 there have been concerns about widespread shortages especially with growing Chinese demand. emissions regulations in major markets such as the European Union It has also been tightened.
Rhodium has long since returned to earth, fetching just over $4,000 an ounce, while palladium is under $1,300 an ounce. Among other things, the uneven recovery in the global economy from the pandemic meltdown, excessive concerns (in hindsight) about shortages, and question marks about the role PGMs will play in the green energy transition have all dethroned rhodium and its peers.
As a result, South African platinum producers saw profits and their share prices plummeted. Amplats’ stock price is down nearly 40% in the year-to-date (YTD), and it lost more than 3% on Monday alone at one point after its trading statement was released.
So far in 2023, Impala Platinum’s share price has also lost nearly 40%, Northam Platinum is about 28% lower, and Sibanye-Stillwater (which has a more diversified production profile, including gold) is down about 32%.
One of the puzzling things about this situation is that PGM production in South Africa over the past twelve months or so has been steadily declining. South Africa remains by far the largest producer of PGM as a basket, and is second only to Russia when it comes to palladium. (Russian non-sanctioned product).
According to data from Statistics South Africa (Stats SA), mining production in South Africa declined for 14 consecutive months year-on-year until April this year when it rose by 3.2%. Precision guided munitions have generally led this downward trajectory.
In the first five months of 2023, PGM production in South Africa fell year-on-year in every month except February, when it grew by 2.8%. In January it fell 15.2%.
Last year was also a story of declining PGM production. In October, it was down nearly 34% year-over-year, and it had only moderate annual expansions in 2022 in May of 3.3% and in January of 1.3%.
Which raises a few questions. The first is why production is down, and second, why aren’t prices going up as a result?
Amplats provided a few details in its trading system about the production decline: the increase at the Polokwane smelter, scheduled maintenance and, of course, the impact of the power outage which it says cost it more than 66,000 ounces in production.
There are two factors that are not in the mix. One is the labor unrest that blighted the sector just over a decade ago when the Miners’ Union and Construction Union (Amcu) burst onto the scene. All of South Africa’s major PGM producers have multi-year wage deals reached without dropping any tools.
Another reason is social unrest and criminality, which, according to industry insiders, has declined significantly as cooperation between businesses and the police has improved. So production is hindered by technical and Eskom factors.
So why aren’t prices responding to production, which has been steadily declining for more than a year?
Well, in 2021 – looking at the archived Stats SA data – production started to pick up in March year on year, although of course it was from a lower base due to the initial shutdown of operations in 2020 under the strict lockdowns to contain the Covid pandemic.
In April 2021, PGM production in South Africa was up 276% YoY, and 2021 production grew strongly each month YoY – and that was in a high price environment, the best of both worlds as it was. So the decline in production since early 2022 has been off a relatively high base.
And the global economy still does not turn off the lights. The International Monetary Fund’s initial dismal forecast for 2023 did not materialize, but global economic growth still slowed to 2.8% this year from 3.4% in 2022. That is simply not good for most goods with industrial applications, unless there is a really severe shortage.
The bottom line is that the South African PGM segment is now in a position where both prices and production are going down, and that will hurt bottom line. But at least it does not appear to be facing the prospect of new labor unrest.
And the price/earnings ratios of the two major PGM producers in South Africa are less than 5.0, which certainly indicates value in the sector. There is a silver lining to these trends and South Africa’s PGM sector may be regaining its magic.
Good investment.
Mr. Dr
