South Africa’s precious future
On April 19, Mzolisi Diliza, Chief Executive of the Chamber of Mines of South Africa made the following statement. “Recently the prices of gold, platinum group metals (PGMs) and crude oil have raced to either new highs, or in some cases, the highest levels in years. The price of gold hit $623/oz in Asia earlier today, the highest level in over two decades. Platinum is at an all time high at US$1114 an ounce, palladium is up to $366/oz and rhodium is at $4,500/oz. In the crude oil market, the tight supply and demand balance, compounded by the geopolitical tensions, has pushed the price upwards with the price of New York’s light sweet crude hitting a historic peak of $71/bbl. The common threads in these markets are the positive fundamentals (especially good demand) and the current geopolitical risk factors that are also encouraging speculative activity.
“In the gold market the increasing investment numbers tend to highlight the geopolitical risks issue with gold being seen as a store of value in possible troubled times. For South Africa the rise in precious metals and crude oil prices is a double edged sword. The good news is that higher precious metals prices will help neutralize the balance of payments impact of the rise in crude oil prices. Assuming a R6/$1 exchange rate, based on 2005 production numbers, every 10% rise in the gold and platinum prices sustained for an average of a year will generate an additional R5.3 billion in exports. This should more than offset a 10% rise in the crude oil price which would add an additional R1.9 billion to the import bill. Higher precious metals prices should continue to support the expansion of the PGM mining sector and help stabilize the gold mining sector. Unfortunately, higher crude oil prices will result in higher local fuel prices which will push up inflation and raise the costs of mining.
“In the first quarter of 2005 the rand gold price was as low as R82,000/kg while the mining costs were R89,000/kg. In 2006 the circumstances have changed considerably as a result of the slower appreciation in the rand exchange rate. The gold price averaged about R109,000/kg in the first quarter of 2006 and is currently at R120,000/kg. A year ago the gold mining industry faced many challenges including viability issues, which brought about major restructuring. In 2005 South African gold production fell by 13% to 296 t, the lowest level since 1924. This year, the improved economic outlook means a much slower rate of decline in production - or even a stabilisation in production. The big “reserve play effect” of falling costs and rising prices gives a larger ore reserve to mine. This should help stabilize the contribution of gold mining to the economy and to employment. The SA gold mining sector remains the largest in the world and a significant contributor to the economy.
“For the PGM mining sector the improvement in rand prices and the growth in production over the past few years has propelled the sector to become the largest component of the South African mining industry with sales of R38 billion in 2005 followed by coal at R35 billion and gold at R27 billion. With rising rand precious metals prices in 2006, mining is clearly demonstrating its resilience and importance to the economy of South Africa.”