Are the strikes In South Africa good for mining companies?

Before we do, however, a brief overview of the situation for those of you who haven't been keeping up, or who have been confused the reports in the press which have uncritically adopted the line put out by the tripartite alliance of the South African Communist Party (SACP), the trade union congress (COSATU) and the ANC. Those organisations have portrayed the action as merely a thuggish attempt by the (not COSATU affiliated) Association of Mineworkers and Construction Union (AMCU) to bolster its own recruitment, placing the blame for the violence not with the mine owners, nor with the police, but with the workers themselves. The SACP even going so far as to call for the "immediate arrest of both [AMCU leaders] Steve Kholekile and Mr Mathunjwa as co-ordinators, planners and leaders of this anarchic and worker to worker violence".

In reality the dispute centres around a demand for increased pay, from their basic monthly salary of R5,405 - with benefits around R9-10,000 - to R12,500 (~$1500). And while there has been violence on both sides, two police were killed, the vast majority has been directed towards the miners by the state. On August 16th in an attempt to break the strike "3,000 police officers, an elite paramilitary unit, supported by horses and helicopters, confronted the miners and delivered their ultimatum." That day 34 workers were shot dead by police, while a further 78 were injured. Around 100-150 have also reportedly been assaulted while in police custody.

Despite this horrific repression, the strike continues. On Monday of this week just 13% of Lonmin's 28,000 workforce reported for work, while there have also been reports of the dispute spreading to other to other mines, owned by other Platinum producing companies.

"Anglo American Platinum, the industry leader with about 45 per cent of global supply, said on Wednesday that a group of workers had bypassed their own unions and made a broad range of demands, including on pay, at the end of last week. Miners at Royal Bafonkeng Platinum, a black-owned, mid-tier miner, also demanded pay increases and blocked colleagues from going to work."

These strikes are not the first in recent times. At the start of this year Impala Platinum faced similar disruption, with strikes lasting five weeks and seeing workers build barricades, sabotage equipment and fight with police at a dispute which similarly escalated in both scale and demand.

All of which one would imagine bodes badly if you're a platinum producing company.

But immediate appearances and conventional wisdom aren't always right. In fact the share prices of the world's largest platinum producers are up in the last few days. Does this simply reflect a belief that the strikes will soon be broken and production will return to normal? perhaps. But perhaps instead it reflects an understanding that a temporary decrease in production could be a good thing for platinum companies.

In the wake of the financial crash platinum prices dropped precipitously. Slumping from a high of $2250/oz to just $774/oz. Since then prices have regained some of their previous value, but in the last year that recovery has gone into reverse, with prices at the start of August around $400/oz lower than they were a year earlier. Put simply platinum production is outstripping demand, and the increased supply is forcing down the price. Credit Suisse report (via FT Alphaville):

"On a forward looking basis the market on our analysis looks oversupplied by c 250-350koz in 2013/14."

If you're a platinum mining company with a lot of capital tied up in mines and equipment and not easily shifted into another sector with better profitability, that's bad. One solution is to artifically reduce supply and so provide at least a floor to prices. Credit Suisse again:

"Platinum producers need to keep production flat over the next two years to bring the market back into balance"

An outbreak of strikes which shut down the mines does just the job. And, indeed, platinum prices are up around 10% since the start of August.

Of course, if you're the one company affected what's good for the sector as a whole isn't always good for you. Lonmin are estimated to be losing around 2500oz a day in production, which translates into something around $3.85m at the current price. If the pain can be evenly shared across the whole sector, however, the situation can be different. After all the platinum is still there, under the ground, so if the prices go up and your total potential supply stays the same, your capitalisation of expected future income increases too. All of which might account for Lonmin's relative stability of share price and Anglo and Impala's 8-10% gains over the last month.