By Afriforesight’s Kirthi Ramdhanee – Head: PGMs and Nathan Musson – Chief Economist
Demand for precious metals is expected to be strong overall through 2024/early-2025 driven by interest in gold, which should remain supported by safe-haven demand (i.e. risk hedging) due to the severe compounding geopolitical rifts, as well as persisting financial market concerns as global interest rate trends shift.
The PGM outlook is more nuanced, with near-term challenges still expected amid underwhelming global manufacturing growth (particularly from the auto-sector, the main driver of PGM demand) and as above-average inflation continues to drag down miners’ profitability. Activity in the key PGM-using industries should however improve from later in 2024 as interest rates become generally more accommodative, which should encourage recovery in vehicle demand growth going forward.
South Africa’s mineral revenues are driven, to a significant extent, by activity in the PGM and gold sectors, which respectively accounted for 24% (R187bn) and 16% (R125bn) of mineral sales, reported by StatsSA for the twelve months to February 2024. Mining activity trends in these sectors are expected to diverge both in the short-term – when SA gold output should improve moderately, while PGM volumes are curbed by ongoing cost/demand pressures – and in the longer-term, where gold activity should decline as viable reserves deplete, while structurally higher costs discourage potential developments, while PGM activity is expected to improve with recovery in global growth. Longer-term PGM activity will, however, depend on the realised pace of transition to particular greener technologies.
SA Gold Outlook
South Africa’s gold sector has faced structural decline throughout the past decade and, while some near-term recovery/growth in activity is expected, the outlook for longer-term volumes remains distinctly negative unless plans change for the major producers. In 2023, domestic volumes improved firmly on the back of Sibanye-Stillwater’s recovery from its early-2022 labour disruptions alongside gains from Harmony Gold’s higher-grade underground operations and stronger activity from mid-tier producers. However, the 96.6 tonnes of gold produced was 39% lower than 2013’s level and, outside of the volatility following the Covid crisis, declines have been consistent.
Even the rapid increases in gold prices realised in recent years have been unable to arrest this trend. Zooming into the past five years, the overall decline in activity remains obvious despite rand-based sales prices doubling over the period.
This decline is being driven by longstanding depletion of viable reserves (due to the sector’s maturity) and structurally higher costs borne by local miners compared to the global average (graph below). Afriforesight’s assessment of commercial gold operations reveals that within the last five years costs for most SA producers have typically been around 40% higher than the global average reported by the World Gold Council.
Despite these structural issues, SA gold production is expected to improve in 2024/2025 with Harmony Gold on schedule to meet its targets amid ongoing optimisation, Goldfields’ South Deep maintaining plans to reach capacity during 2024, and Sibanye-Stillwater expected to see some improvement after recent disruptions.
Beyond the near-term improvement, a sustained decline is unfortunately expected into the medium- and longer-terms with both Harmony and Sibanye (which together accounted for 67% of SA gold output reported by the DMRE for 2022) planning to cut back sharply on investment and volumes targeted in SA from 2025/2026. However, with global gold prices expected to remain strong in the coming years, some additional exploration and/or assessment of potential brownfields operations may enable partial supply recovery in the medium term.
PGM Sector Outlook
South Africa holds about 90% of the world’s known Platinum Group metal (PGM) reserves. It is the largest producer of mined platinum (70-75% global mined supply), ruthenium (about 90%), rhodium and iridium (about 80% for both), and second only to Russia for mined production of palladium (about 35-40% for SA compared to Russia’s 40%), making the country’s PGM industry pivotal to the global landscape.
Following consolidation in the PGM industry in recent years, the major SA PGM miners are now Sibanye-Stillwater, Anglo American Platinum (Amplats), and Impala Platinum (Implats).
A factor encouraging this consolidation has been severe pressure on profitability from rapid price declines alongside sharp operating cost inflation in the past two years. Additional supply challenges such as, intermittent electricity supply, political instability, labour disruptions, copper cable theft, mine shaft depletions and declining ore grades have also crippled the PGM industry’s growth potential.
The impact of declining ore grades is potentially the most notable structural concern, as this necessitates accessing richer and often deeper deposits if miners aim to sustain or expand overall volumes, which tends to be more capital and energy intensive. Considering the current subdued PGM basket prices, this can quickly lead to shafts becoming unprofitable.
Besides these mining challenges, PGM producers are also facing strong cost pressures from sharply rising electricity costs, as well as surging material and fuel costs in recent years. PGM production costs have been boosted further by elevated inflation of processing chemical costs, which surged in 2022 as the impact of renewable energy deficits in Europe and China reverberated around the world, only for global energy market disruptions to be worsened by fallout from the Russia-Ukraine conflict. While product prices mostly eased in 2023, some chemicals crucial for PGM processing remain 25%-60% more costly than early in 2019. Congestion and delays at SA ports, intensified by the rerouting of vessels around Africa due to the heightened Middle East concerns, should also limit near-term availability of imported chemical feedstocks, constraining chemicals supply further and placing upwards pressure on prices.
PGM basket prices have declined rapidly since 2021/2022 as major disruptions to supply chains and persisting chip shortages curbed demand from the global automotive sector (which accounts for 47% of platinum demand and 80%-90% of palladium and rhodium demand), while more recently, the higher interest rate environment in most regions has been slowing consumer spending of larger purchases such as vehicles.
The lower PGM basket prices coupled with the higher operation costs are squeezing PGM margins and pressuring miners to restructure to stay afloat, with much of the sector delaying projects and postponing investment plans for expansions. Unfortunately, labour has been one of the categories mostly affected by these repositioning strategies. In an indication of the current constrained operating environment for PGM miners, the key operators Implats, Sibanye-Stillwater and Amplats, as well as the Chinese-owned Wesizwe Platinum (which planned to develop a 420kozpa mine) are also targeting significant cost-cutting measures including job cuts and shaft restructuring or closures.
On a somewhat brighter side, a risk which has the potential to be mitigated in the medium term is the ongoing challenge of loadshedding. At stage 6 or higher, underground mines (which are the majority in SA) are typically forced to curtail or pause operations. Supported by incentives like the government’s exemption of self-use power producers from generation licence requirements to accelerate the addition of generation capacity in the country, miners are increasingly investing in the development of onsite electricity generation solutions such as solar and wind farms. However, many of these projects will only come online from 2025 onwards. Some miners currently switch to generators during loadshedding, which is relatively unsustainable given the sharply rising domestic fuel costs and environmental implications.
Until this potential relief on power supply disruptions is realised, intermittent buildups of work-in-progress inventories are likely to remain a consequence of Eskom’s deficiencies as the entire production process from extraction and concentration to refining can take up to six months.
Owing to the various challenges highlighted, and the potential for further external constraints, South African supply is expected to decline in 2024; however, expectations of improving demand are providing some hope for the PGM industry. Platinum, Palladium and Rhodium are used mainly to manufacture autocatalysts for combustion engine vehicles; demand for which should rise as many countries tighten emissions standards and as the transition to low- or zero-emission new energy vehicles occurs more slowly than the market originally anticipated. A more-gradual transition away from standard vehicles, and the increasing acceptance of dual-approach options like hybrids or e-fuels should sustain some portion of PGM demand from the auto sector into the longer-term. Recovery in industrial demand is also expected once the elevated interest rates prevalent in most regions begin to ease.
