“This has been yet another very challenging year for Implats and the platinum sector as a whole

Responding to a challenging business context

This has been yet another very challenging year for Implats and the platinum sector as a whole, with low PGM prices, general volatility in global markets and difficult operating conditions in South Africa and Zimbabwe. Continuing regulatory and policy uncertainty, increased production costs and persistent electricity supply constraints have been accompanied by heightened stakeholder expectations on a range of fronts. Neighbouring communities are demanding greater economic opportunities and improved local services, governments are pushing for rapid transformation, indigenisation and employment, unions are taking a tough stance on wages and job protection, and a wary investment community continues to put pressure on cost efficiency, capital management and the delivery of dividends.

Subdued PGM prices amidst a tough production environment

PGM prices have generally remained subdued throughout the year. Platinum was down from a high of US$1 520 in early July 2014 to around US$1 080 by financial year end and broke the US$1 000 mark in August 2015, while the other PGMs remained generally flat after an initial peak early in the year. Depressed platinum prices come on the backdrop of a market driven mainly by investor sentiments on stock overhang, rather than by market fundamentals.

The outlook for the global economy and the PGM market continues to be uncertain, driven by continuing geopolitical tensions, divergent monetary policies, and further financial and exchange rate volatility. In the United States of America, the economic outlook is positive, with GDP growth supported by increased employment, gains in real income, and an accommodating monetary policy. Retail sales rose in March for the first time since November as consumers stepped up purchases of vehicles and other goods, suggesting that the sharp slowdown in economic growth in the first quarter was temporary and more to do with unfavourable weather. The backdrop of low interest rates and an improving labour market, coupled with a drop in fuel prices, has boosted vehicle sales.

Vehicle sales have also increased in Western Europe, reflecting improving consumer confidence across the region. While growth is likely to improve in the eurozone, uncertainties remain regarding the impact of the Greek bailout agreement and possible developments in the Ukraine. In China, the recent significant fall in equity markets and the devaluing of the yuan suggests that the world’s second-largest economy may be losing momentum, as the country seeks to find the right policy mix to sustain growth. Despite slowing growth fears, there has been positive growth in vehicle sales in both China and India. In contrast, the Japanese market has seen a decline in sales, where the economy remains sluggish.

Looking to the future in the PGM market, we anticipate a slow but steady growth in demand, driven by the gradual economic recovery in the US and Europe, as well as an increasing middle class in India and China fuelling demand for diesel vehicles and platinum-based jewellery. The recent negative diesel sentiment is likely to result in increased legislation for emission controls and ultimately higher PGM loading to meet compliance standards and hence increase demand. On the supply side, industry is expected to return to pre-strike production levels by 2016, accompanied by a relative slowdown in the availability of recycled PGM primarily as a result of the recent rapid decrease in global average new vehicle engine size. While there is no complete certainty on current liquid stocks, based on a range of available figures it is assumed that these will be depleted either by the end of this year or as late as mid-2018. Given current and projected market sentiment, and expectations for a stronger US dollar, we anticipate that PGM prices will remain lower for longer, possibly for the next 24 months.

The sluggish PGM market has been accompanied by a challenging production environment, characterised by rising labour, consumable and utility cost inflation, continuing uncertainty regarding the availability and cost of electricity, and lower production volumes mainly as a result of the build-up after the prolonged strike. Given this tough operating context, which has seen reduced sales and revenues and higher unit costs, it is increasingly difficult to meet the growing, and often conflicting, expectations of our stakeholders. Over the short term, our focus necessarily is on ensuring the continuing financial viability of the business, which is constraining our ability to deliver on addressing some of the immediate social challenges surrounding our operations.