This Is What Could Drive Platinum Higher, Very Soon

Platinum bars
Oliver Cleve | Getty Images
Platinum bars

The likelihood of strikes this May and June by workers in South Africa's strategic mining sector may curb output from the world's largest supplier of platinum, presenting an upside risk for the precious metal, analysts said.

The catalyst for any upswing may come as early as this week when Anglo American Platinum (Amplats) - the world's top platinum producer and a unit of Anglo American - reveals the outcome of talks with the government and unions about restructuring plans that may involve cutting up to 14,000 jobs and mothballing two mines in South Africa.

"Whenever someone mentions restructuring to me, I get a bit nervous," Jonathan Barratt, editor and founder of commodities newsletter Barratt's Bulletin, told CNBC Asia's "Squawk Box"on Monday.

Any labor unrest may swiftly rekindle bitter memories of violent confrontations last year at the Marikana mine owned by the world's third-largest platinum producer Lonmin where 34 striking miners were shot dead by police last August in South Africa's deadliest security incident since the end of apartheid in 1994.

(Read More: US Crude May Hit $100 on Payrolls, Geo-Politics)

Any industrial action this year will coincide with wage talks across South Africa's mining sector, which start this month.

"South Africa has a history of labor issues," Barratt said. "Remember the PGM [the platinum group of metals] market is very tightly controlled so any concerns there in terms of labor issues will hit the market relatively quickly. As a result, I think you will see a bounce" in prices.

Platinum prices fell to their lowest since mid-August in mid-April to about $1,490.24 an ounce. Prices closed at $1,516.50 on Thursday, trading at a premium to the gold price. Palladium rallied 3 percent on buying ahead of wage talks between South Africa's major mining unions and producers of platinum group metals (PGMs).

Commerzbank analysts said PGMs could trade "significantly higher as the year progresses" if unrest escalates, disrupting production in what the bank warned would be a "vicious cycle."

(Read More: 'Dr Copper' Attempts Some Self-Healing)

As producers concentrate on trying to contain costs, "the result could well be the (partial or entire) closure of mines with high production costs, with the large-scale redundancies that this would entail," Commerzbank's Barbara Lambrecht wrote in a report on May 7.

"Workers would doubtless protest against this, which would lead to further production outages, thereby continuing the vicious cycle," she said. "Platinum and palladium prices should thus be find good downside support. In view of the numerous risks to supply, we see continued high upside potential for both platinum and palladium prices."

Commerzbank forecasts platinum prices will average $1,450/ounce this quarter, rising to $1,550 in the third-quarter and $1,700 in the fourth.


The latest round of Amplats restructuring talks were extended for a month at the end of March and the final plan had been expected to be unveiled this week. "However, the parties are still in the process of concluding the details of the consultation and its outcome will be communicated during the week commencing 6 May 2013," the company said in a statement on its website on April 30.

Political risk consultancy Eurasia Group said that Amplats may "walk-back" its restructuring plans following intense opposition from the ruling African National Congress and labor unions. According to unverified media reports, the company will reduce layoffs by a half to two-thirds and presumably scale back production cuts, Eurasia Group said in a report last Friday.

If true, such a scaled back plan "would represent a victory for the government, the ANC and by proxy ANC-linked National Union of Mineworkers (NUM)," said Mark Rosenberg, Senior Africa analyst at the Eurasia Group.

(Read More: Would You Buy a 'Man-Made' Diamond?)

Nevertheless, the NUM has been "displaced" by the more militant Association of Mineworkers and Construction Union (AMCU) as the majority union at Amplats, Rosenberg said, warning the AMCU "will likely reject the Amplats plan, even if it does significantly scale-back retrenchments." That raises a "high risk" of strikes and production losses in May and June, he added.

"AMCU has enlisted the majority of platinum workers and claims 'control' over Rustenberg, the platinum-mining town near Marikana from where a big chunk of the layoffs will come," Rosenberg said. "The union will view the Amplats restructuring [however it shakes out] as a threat to its new-found power and will likely fight to maintain it."