High cost marginal operations will be dropped as mines look to preserve cash and ensure profitability.
"Resource prices are likely to pick up at the tail end of second quarter once the global economic slow down starts lifting but not by the substantial margins that will spur increased production," notes Frost & Sullivan (frost.com) metals and mining analyst Wonder Nyanjowa. "Production output, particularly for gold and platinum, will continue declining. We expect gold production to fall from the 240 tonnes produced in 2008 to around 229 tonnes this year."
Nyanjowa says that gold price, which ended 2008 at $865 per ounce, is expected to continue rising slowly and may again break the $1000 an ounce level in the course of this year. He says that gold's status as a safe-haven has protected it from the significant falls in prices seen in some other resources.
Platinum's price is however closely tied to developments in the global automotive industry, which is the single largest source of demand for the precious metal. The prolonged delay by the leading three United States automakers in accessing bail out funds, the one month long closure of Chrysler and declining new vehicle sales across Europe and America will continue to depress sentiment in the platinum industry.
Some industry players expect an about turn in demand fundamentals in 18 months time. Different mines will be taking different approaches to manage in the interim.
"Lonmin has laid off 5 500 employees to trim its cost structures, whilst Anglo Platinum has halved its capital expenditure and is monitoring production levels in view of the demand for platinum," Nyanjowa says. "This is even though more than 60% of Anglo Platinum production could be unprofitable at current levels. The RBC study released in August 2008 suggests that it was costing the company $1200.00 to produce an ounce of platinum."
The collapse of Impala Platinum's bid for Mvelaphanda and Northam, coupled with the rejection of Xstrata's $10 billion bid for Lonmin, indicate a temporary end to mergers in this sector. The appetite may however return once commodity prices and demand for metals start climbing again, as company valuations will be at attractive levels.
"Issues around electricity, safety, skills and labour activism will deliver further production cuts in the platinum sector this year". Nyanjowa says. "Production dropped from 5.2 million ounces in 2007 to 5.1 million ounces in 2008, and we expect it to decline further to about 4.9 million ounces in 2009."
Overall, the industry can expect job losses to be widespread as companies restructure their operations in view of weaker demand and lower resource prices. Only the coal industry may be spared, as Eskom provides a ready market for all domestic produce and electricity generation expansion remains a top priority.If you are interested in receiving more information on Frost & Sullivan's analysis of African metals & mining markets, then send an email to Patrick Cairns - Corporate Communications at patrick.carins[.]frost.com with your full name, company name, title, telephone number, email address, city, state and country. Upon receipt of the above information, more information will be sent to you by email.
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