In South Africa this year, the platinum mining industry has taken a major turn for the worse.
The recent clashes involving striking workers, non-striking workers, police, and mining companies have resulted in a bloodbath – sending shockwaves around the world and forcing large-scale mining operations to screech to a halt.
The world’s largest platinum producers including Anglo American Platinum, Impala Platinum, and Lonmin have buckled under a wave of strikes that have sucked in around 80,000 workers and counting.
The current death toll stands at 46 lives and is now considered the worst bout of violence in post-apartheid South Africa.
But although Lonmin workers recently sealed a hefty wage hike of 22%, signaling a possible end to the violence, I believe it’s only just begun.
In fact, I think this unrest will continue and we’ll see more violence and suffering in the weeks and months ahead.
Because Sadly, Things Will Only Get Worse From Here…
Let me explain why.
You see, as noble as it is for labor unions to fight for higher wages and workers’ rights, the fact of the matter is businesses must make a profit in order to stay alive.
And this fact can’t be more apparent than in South Africa’s mining industry, where companies traditionally operate on razor-thin margins due to inflated costs.
According to a recent report by Price Waterhouse Coopers, “Platinum (in 2011) suffered from pessimistic global views… The lack of any sustainable real price growth underlines the margin pressure experienced by a number of mines in South Africa. It demonstrates how cost pressures have eroded profitability in the industry.”
In other words, when a company can barely afford to stay afloat, it simply can’t absorb major shocks like a giant hike in wages.
And surprise, the telltale signs are already beginning to show.
As Mark Cutifani, CEO of South Africa-based AngloGold Ashanti commented: “The industry is on a knife’s age, 50 per cent of the platinum industry is losing cash now, before you consider additional salary increases. It’s very serious.”
And according to JP Morgan: “The ripple effects will continue to be felt. The outcome of the negotiation at Lonmin’s Marikana project will likely set a new benchmark for mining more generally and wage costs are set to rise substantially.”
It’s Simple Economics
Razor-thin margins + globally uncompetitive labor costs = failed mining projects.
Lonmin is already in serious trouble. Anglo American Platinum and Impala Platinum will feel the pain as well.
As sad as it is, I’m afraid South Africa’s labor unions will soon find that they fought and died for jobs that will no longer exist.
And they’ll realize that the one thing worse than not making enough, is not making anything at all.
But hey, on the flipside, platinum prices will rise as a result of this debacle.
So as the old saying goes, “buy when there’s blood in the streets.”
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