The reopening of the Chinese economy is expected to boost demand for metals following strict Covid lockdowns, but analysts and industry players fear load-shedding will worsen this year and, combined with logistics problems, place the sector under greater pressure.
Eskom this week implemented stage 6 load-shedding, underscoring the prospect of continued power insecurity this year following peak load-shedding just four months ago in September.
State-owned logistics firm Transnet has also been hamstrung by rail and port constraints. In 2021 large-scale cable theft, vandalism, unavailability of locomotive and spare parts, and infrastructure bottlenecks cost mining houses billions in lost export revenue.
FNB Wealth & Investments equity research analyst Makhosi Nyamela said this week South Africa's electricity crisis would be worse this year in terms of breakdowns at Eskom’s coal power plants, with harsh consequences for underground mining and smelters.
Based on the production guidance from companies, these expected breakdowns had been factored into their calculations — but perhaps by not enough. “Even though many companies have revised their production guidance downwards, you could find that there could be further downgrades,” Nyamela said.
Eskom has load-curtailment arrangements with mining companies to reduce power use at peak periods, and during last year’s intensive load-shedding the arrangements cut output at platinum group metals (PGM) producers.
Last month Anglo American Platinum CEO Natascha Viljoen was quoted as saying load-curtailment last year had been “more than we have flexibility in the system for, and we have seen more impact on the operations”.
The forecast gold production in South Africa this year.
— IN NUMBERS: 90,000kg
Sibanye-Stillwater said production was hampered by “unprecedented” power curtailment imposed by Eskom during the third quarter ended September 2022 and by a significant rise in theft of copper cable.
Impala Platinum also said it had been hit by the severity of load curtailment between July and September.
Steph Erasmus, an investment analyst at Anchor Capital, said South Africa’s gold output would fall from 100,000kg in 2021 to 95,000kg in 2022 and even further this year to 90,000kg.
He said the gold industry, which was rocked by a three-month wage strike at Sibanye last year, had been in long-term decline for years.
“South Africa was once the world’s top gold producer but is now barely in the top 10 and faces numerous challenges beyond the geological ones of deeper mines and lower grades,” he said.
South Africa was once the world’s top gold producer but is now barely in the top 10 and faces numerous challenges beyond the geological ones of deeper mines and lower grades
— Steph Erasmus, Anchor Capital
In addition to power woes, persistent inflation was a problem, Deal Leaders International CEO Andrew Bahlmann said.
Inflation led to higher commodity prices, operating costs and capital expenditure last year.
“Some companies are reporting mining inflation in Africa at the level of about 20% mid-2022,” he said.
According to Minerals Council South Africa data for 2021, costs rose much faster than headline consumer price index inflation, by a margin of almost four percentage points. It said input costs had generally increased more rapidly than commodity prices.
Seleho Tsatsi, an investment analyst at Anchor Capital, said the reopening of the Chinese economy would be positive in light of China’s big share of the global vehicle market. “China's reopening should be a real driver of demand for this year,” he said.
Tsatsi said though PGM stocks were higher, prices were muted. For example, the price of rhodium at $12,200 an ounce was 21% down on the 2022 average and palladium prices were 15% lower than the 2022 average.
Iron ore, an ingredient in steelmaking, rallied last month after China announced the easing of its lockdown, Tsatsi said.
He said the record profits recently experienced in the PGM sector were peaking and likely to wane. “We have peaked or are close to the peak in terms of PGM profitability. Prices are off their highs, and cost inflation is up. Companies might start putting more money into capex rather than dividends, so shareholder returns might be a bit weaker.”
While prices had come off last year’s peaks, balance sheets for most companies remained robust, said analysts.
Nyamela said strong balance sheets and the energy transition will be key drivers of merger & acquisition activity in the sector as companies align their portfolios to metals that are key to the move away from fossil fuels.
Exxaro Resources, for example, plans to diversify into copper and bauxite while rivals Impala Platinum and Northam Platinum are vying to acquire Royal Bafokeng Platinum, a deal that is expected to close this year.
Nyamela said whichever of the two companies lost out in the hunt for Royal Bafokeng would have “a lot of capital that they could deploy”.
Bahlmann said producers had seen their stock prices come down “a fair bit”, creating conditions favourable for consolidation, which cash-flush companies would be well-placed to take advantage of.
He said it was an opportune time for resource companies to invest in projects through capital commitments and M&A activity. “The flip side of this equation is that fears of a global recession may cool transaction activity — but I am of the opinion it will fuel opportunities, maybe not in the first quarter but by midyear.”
He said intensified M&A activity was typical when commodity prices were high and, done properly, such deals could enable companies to improve efficiency and reduce production costs.
“This positively impacts company profits and creates additional shareholder value, and producers are looking for such outcomes at the moment through M&As targeting all stages of the project cycle, from feasibility to late-stage, depending on the investor strategy,” he said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.