South Africa's vast mineral (non-energy) reserves are worth roughly $2.5 trillion. The country produces approximately 77 percent of the world's platinum, 86 percent of its rhodium and 35 percent of its palladium. Notably, rhodium and palladium are part of the platinum metals group and can replace platinum in some applications. The platinum metals group accounts for around 92 percent of South Africa's mineral reserves. In 2011 the platinum metals group accounted for 12 percent of South Africa's exports, higher than any other group of commodities or products. Simply put, with 80 percent of global platinum reserves, South Africa is the world's foremost platinum metals provider, and as such, it will likely benefit from an increase in the price of platinum.
Gold is becoming a less important component of the South African economy. From 1896 to 2007, South Africa was the world's largest gold producer; in 1970, it was responsible for as much as 67 percent of global production. South African gold now amounts to just 6 percent of world production; total output has declined by roughly 80 percent. Gold's share of South African exports has fallen from 56 percent in 1980 to just 7 percent in 2011.
Prices and Profit Margins
Despite South Africa's reserves, gold and platinum metals are not that competitive. This is because producing the minerals is incredibly expensive — a fact seen most evidently in labor and energy costs.
Extracting gold and platinum metals is labor-intensive and dangerous. Extensive mining has exhausted easily accessible deposits. As a result, mining shafts have become deeper and narrower, rendering mechanized extraction methods relatively ineffective; manual extraction is required. Some producers, such as Lonmin, have abandoned mechanized extraction altogether because the process is so unproductive.
The quality of ore, particularly in South Africa's gold mines, has also decreased. This means that more ore has to be mined, transported and processed to produce an ounce of gold or platinum. Ore processing is expensive, and naturally, the need for more processing increases production costs. For Pretoria, this is a foreboding prospect, considering energy prices in South Africa have increased by an average of 27 percent annually since 2008.
The associated energy and labor costs make it more expensive to produce gold and platinum metals in South Africa than in any other country. The price for gold is still high enough to offset high production costs. In fact, producers still turn a $500 profit for every ounce of gold they sell. However, production costs vary widely from mine to mine, leaving those with higher expenditures little money to dedicate to future ventures. As long as gold prices remain high, producers will continue to operate in the less expensive mines. For others, the costs may become too unpalatable.
The profit margin for platinum is not as high. For the first half of 2012 — before the recent strikes began — Amplats spent more than $2,000 per ounce of platinum it produced. Meanwhile, the price of platinum was only $1,628 per ounce. Platinum recycling, which accounts for 25 percent of the platinum supply, has helped supply outpace demand and thus has pushed down prices.
However, demand for platinum is starting to rise. Platinum primarily is used in catalytic converters, which help make emissions from internal combustion engines less harmful. Palladium can also be used, but the process requires roughly twice as much palladium as platinum. Thus, when palladium costs less than half as much as platinum, it becomes a cost-effective substitute. There is a growing demand for improved emissions requirements for cars, so the demand for platinum metals likewise will grow.
Dwindling palladium reserves in places such as Russia, the world's largest palladium supplier, will also spur increased demand for platinum. This in turn will offset production costs by driving prices up — a development that will benefit platinum-rich South Africa. If labor costs continue to rise — as they did for Lonmin when it agreed to pay its workers higher wages — profits cannot be maximized, and more companies may fire laborers rather than pay them.
For these reasons, platinum mines likely will not be abandoned as readily as gold mines. Unlike platinum, South Africa does not control that much of the world's supply of gold, so higher production costs could discourage gold mining companies from investing in South Africa. In fact, AngloGold Ashanti, the world's third-largest producer of gold, operates in 10 different countries, including South Africa, and is trying to diversify away from South African gold. While other major producers have been making similar moves, they still rely on South Africa for more than half of their gold production. But soon they will likely try to invest and produce in less expensive countries.
Editor's Note: An earlier version of this analysis mischaracterized the role of the platinum metals group within the South African economy. The group accounts for 92 percent of South Africa's mineral reserves.
