South Africa is the
world’s largest producer of platinum and up until some years ago was the world’s
largest gold producer. Both these precious metals have staked their claim as
strategic resources in generating foreign revenues to aid an ailing current
account deficit.
However on the 23rd January 2014, members of the
union AMCU (Association of Mineworkers & Construction Workers Union) downed
tools and went on strike demanding a basic minimum wage of R12 500 per
month. Since then no resolution has been made leaving many, in what’s dubbed
the platinum belt of South Africa, in dire straits.
As traders our job is to seek out opportunities where they
are present and an event such as this strike some would hope it would provide
impetus to the platinum price breaking higher. However many traders have been
left red faced with the lack of any direction taking shape in the past 4
months.
On the chart below we can see that the price has been
oscillating between the levels of $1490 and $1400. One would think given the
fact that the 3 largest platinum producers have been severely affected in this
strike it would create a shortage and thus drive the price higher. This is not
the case.
The price of platinum has in fact been directionless since
October last year. Platinum, which is used in cars catalytic convertors to
prevent harmful emissions entering the atmosphere, is very reliant on the
production on motor vehicle manufacturing.
Although much has been said about the recovery of the United
States economy a lot is left to be desired. Not much is expected to come from
Europe as their growth is slowly grinding forward and who can forget the “sleeping
giant” China who is currently facing a risk of a much deeper slow down than had
been previously thought.
The chart above illustrates the price of platinum over the
last year on a daily basis. I have used 3 different coloured lines to highlight
specific periods which I thought could provide useful in unpacking the price
action and maybe suggest the direction we could see. I’ll explain each one
further.
The black line highlights a longer term range which has been
in place since October 2013. Through November and December 2013 the price laid
outside which we can conclude was a false break as the price crept back into
the range in the beginning of 2014.
The resistance comes in at $1490 and support at $1380, a
break in either direction would lead to a price higher or lower but as we can
see towards the end of last year the price did sit outside the range only to
creep back in. These are the foundations
of the range.
The red line represents the beginning of 2014 and all the
price action to the right of the line would represent the days which have
pasted so far. This I believed to be important because the price has bounced
back and forth between the mentioned support and resistance without breaking as
happened to the left of the red line.
The lime green line is a shorter term range which would
correctly represent the period from where the strike has been in place. The range is slightly smaller than the longer
term range but the resistance still bumps up against $1490.
This analysis points to one fact, the price of platinum
seems to be tracking sideways which would suggest the strike has had no
sympathy for the strikers and more relief for the producers. If the world
economy was growing at a pace we had seen pre-financial crisis, maybe we would
have seen a spike in price but we haven’t, this would suggest that the recovery
we are experiencing is much worse than politicians are proclaiming.
It would also suggest that although the 3 largest producers are
affected other companies in the sector are still producing enough quantity to
be able to hold the price back from any move higher. We could deduce that the
platinum industry could be in much more trouble than a wage increase.
With this being said in my opinion it would be a bad move
for AMCU to carry on with this strike. The timing of its strike couldn’t have
been worse and right now they could be in a very compromising position where
they are going to let down a lot of hopeful people who have support this
campaign for 4 months with no pay. They seriously are running the risk of
becoming the big bad wolf.
The platinum producers are aware of these risks to the
industry but will continue to prolong this strike. They would rather be in a
position where they consume no expense, exhaust their stockpiles and pay no
workers to artificially inflate the price of platinum.
Government intervention has been as efficient as loosening a
nut with a screw driver. One possible
reason could be the ANC‘s alliance with Cosatu, the monopoly union before AMCU
came on to the scene. The government would want to ensure that the power of
Cosatu is returned to where it once was and by ignoring the interruption and
dire situation they are able to portray AMCU in an unfavourable light.
The government is risking the well-being of the South African
economy at the expense of all its citizens for their own political gain. Only
recently Stats SA announced a contraction in the economy quarter on quarter.
One only has to look back a few years ago where the gold
mining industry was subjected to the similar demands by workers and
subsequently led South Africa to slipping in its place as the top producer.
Gold was once an important resource to leverage the country
forward and we see that platinum has taken its place. What’s most concerning is
that the same is now happening in the platinum sector and if all parties cannot
come to the negotiating table and iron out the problems we could be seeing an
end of an era in the mining industry where it’s prominence holds no importance.
An industry in which
a large number of people are employed, an industry where pockets of value lie
untapped and an industry which keeps an economy alive.
If you would like to contact me you can
through my email at cadetrader@gmail.com
or if you wish to follow me on twitter and get the latest updates of news,
interesting commentary and general trends in the market, my twitter handle is
@CadeTradeR if you follow this link it’ll take you directly to my twitter
timeline: https://twitter.com/CadeTradeR
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