Three South African companies companies dominate The number and scope of platinum’s industrial uses have skyrocketed during this century to include neurological and dental apparatus, drugs for cancer treatment, computer and automotive equipment. One of its most essential uses is in auto Atlantic converters and within autocratically, platinum converts harmful emissions into carbon dioxide and water. Whereas traditionally, platinum had been used for jewelry with China, Japan and USA being the most consumer.
The demand for platinum Is largely driven by the market, where The analysis of platinum Industry based on Porter’s Five Forces model reflect the extent to which the bargaining power of suppliers Is limited since there are number of contracting companies providing goods and services to the few platinum mines. However there’s high level of entry barriers in the market due to the large capital investment required to establish the platinum mine with limited access to platinum as the resources.
There’s relative low threat of substitute in this industry. In the 19th century, platinum Jewelry remained rare until high-temperature jeweler’ torches were developed later. Once this development was made, Jewelry makers were quick to take advantage of platinum. According to the Masquerade Commodities Research (201 1) it is expected that the rolling demand from Industrial and automobile sectors will result In a very tight supply-demand balance between 2011 and 2013. Deficits are however expected from 2013, onwards.
This trend will exult in an increase in market prices. The increase in price will also motivate investment. However, these changes are expected to take some time, as investors make the necessary adjustments, although speculative investment decisions may result in a further upward pressure on the prices. From the above analysis, a steady increase in prices and volumes supplied on the market, coupled with marginally increasing operating costs, profitability is expected to also increase between 2011 and 2013.
Due to the nature of the industry, where there are limited substitutes as well as barriers to entry, platinum mining companies are expected to continue raring positive economic profits Mining in South Africa will continue to present uncertainty around the Issue of nationalization and black empowerment rules, combined with an Issue of community relations as most Platinum Group Metals are under heavy pressure to provide Jobs and basic services such as water and electricity within the community in which they operates.
Platinum can be used for various applications and the fluctuations in the platinum price over the last few years can be mostly attributed to demand changes in the market. Around 70% of the world Platinum supplies goes into the Autocratically and Platinum Jewelry market respectively. The economic recession in 2008 and the substantial growth in the Chinese Platinum Jewelry market are some of the factors that have caused these market fluctuations. Platinum demand by application Total in 2010: 5. 72 million oz Platinum demand by application Platinum supply by region Total in 2010: 6. 1 million oz Figurer South Africa supplies 76% of the world’s Platinum. Most of the Platinum produced in South Africa is exported into the world market and the profitability of the mining houses in South Africa therefore depends on a good export price which is linked to he Rand/Dollar exchange rate and market demand. The Platinum price has had substantial fluctuations in the last few years and for future investment it’s important to understand the dynamics of a market that is continuously evolving.
There have been big changes in demand and the structure of the market as a result of the changing world economy. The big growth in the Chinese Platinum Jewelry market and the world moving to a more “green” focus with new legislation and emission regulations being implemented across the globe are Just some of the factors that has impacted the Platinum business in the last 5 years. Figure XX Autocratically The most widely used application of platinum is as Autocratically in the automotive industry that currently accounts for about 40% of all platinum demand in the world.
Platinum together with Palladium and Rhodium are primary elements in Autocratically that convert most of the harmful emissions of hydro-carbons, carbon monoxide, oxides of nitrogen and particulate into less harmful carbon dioxide, nitrogen and water vapor. In the sass’s there was a switch from platinum to palladium in the United States due to the lower cost and relatively better performance in Autocratically. The Chinese have adapted this technology and these wow markets remain palladium intensive.
The economic recession in 2008 caused a big drop in vehicle sales. Vehicle production in turn reacted to the sudden drop in new vehicle sales by lowering the production volumes with most new vehicles sold out of inventory stocks. This resulted in an 18% drop in demand for Platinum in the of the decreasing Platinum price which resulted in a decrease in the volumes supplied to the market. The Platinum price continued to decrease during this period as the drop in demand was so significant that the reduction in supply could not counter the market imbalance.
Most of the big mining houses continued to supply at a fairly consistent rate to try and maximize profits which put further strain on an already oversupplied market. Since 2009 most of the new vehicle stocks have been depleted and production volumes in the automotive industry are picking up to rebuild these inventories. Commercial vehicle sales have also increased substantially with the economic recovery and the increased availability of credit. Platinum has also remained the dominant component in diesel emission treatment systems. The European Union is the biggest automotive producers in the world consuming more than 55% of the
Platinum in the Autocratically industry and an increase in the sales of diesel cars in Europe closer to 50% of market share has led to a corresponding increase in the Platinum demand in this market. The net result is the increase in demand from 2009 that resulted in the reasonable recovery of the Platinum price in 2010. The strong Rand and the electricity issues in South Africa may impact the future supply of Platinum and with the rising demand in the automotive industry the supply-demand balance might continue to become tighter pushing up the Platinum price in the next few years.
Jewelry The Platinum Jewelry market is the second largest consumer of Platinum in the world and along with the automotive industry consumes 75% of the world’s Jewelry Platinum annually. The Chinese are the highest consumers Platinum Jewelry accounting for 70% of the world Platinum Jewelry market in 2010. The apparent increase in platinum use, in particular during the last half of the 20th century, notably in Jewelry in China as it is valued as a means of displaying wealth have can be mostly attributed to the fluctuations and demand changes in the market.
The Chinese particularly switched to pure platinum Jewelry because it is extremely oft and it is susceptible to scratching and marring. This trend of the increase platinum Jewelry increased slightly in other developing countries but significantly so in China and the USA, while the amount purchased by Japan decreased to the point where China eventually became the leading market of platinum Jewelry in the world. While the economic recession caused a substantial decrease in the autocratically industry as car sales decreased, the increase and growth of the Chinese platinum Jewelry continued to rise from 2008 to 2009.
The demand by application of platinum by the Chinese increased from 25. 78% in 2008 to almost double at 1. 35% in 2009. Tough the demand in generally decreased sharply in 2008 (due to the economic recession), the supply sharply increased due to the application in the platinum Jewelry in China as depicted in figure XX above. Unless the price of platinum rich Jewelry increases to the point where purchases are discouraged or China, one of the most populated country and the fastest growing economy in the world. B) Output and price changes in the last five years using the demand and supply Platinum: Porter’s Five Forces Framework 1 . Market Structure Suppliers South Africa supplies 76% of the world’s platinum while Russia supplies 13%. This means that 90% of the world’s supply is from only 2 countries. The supply of platinum for 2010 is depicted below: (Source: Adapted from http://www. Platinum. Matthew. Com ) Market The 2 * 50% autocratically (US uses palladium)(Europe – platinum) (China growing) consume 70% of world’s platinum Jewelry 70% of market is in these 2 areas What is it used for?
Very high-level Degree of Differentiation * 20% Jewelry The platinum market role-players, like those of other commodity markets, are more price-takers than printmakers; the role of price-maker can only really be achieved by means of a monopoly or oligopoly (which may exist), where one is able to control and influence one’s market/ industry dominance. For one South African Platinum Mining Company (SCAMP) to have an edge over its rivals, it is required to generate some additional form of competitive advantage, outpacing very similar competitors without much differentiation.
Thus with technical factors being eliminated, management of these SCAMP, must seek greater intangible factors of competitive advantage, to outperform their competitors. Summary of technical competitive advantages ; Robbery accessibility Exploration ability ; Width of robbery ; Grade management of grade quality ; Metallurgical properties and recovery quality ; Mining method, mine design and depth below surface ; Geological anomalies and ground conditions.
The SCAMP have only one choice-?as they are all price-takers they must operate at the lowest cost possible to maximize profits. They operate in a market where: ; Buyers are all price sensitive ; There is no differentiation in the platinum ; Platinum is used in the same ways, has the same user requirements ; Buyers can switch at no cost, platinum to palladium Platinum is sold on metal exchanges, through contract. To achieve the lowest cost advantage, they have to be more skilled than their rivals in controlling structural and operational cost drivers.
Innovative ways to save costs must be constantly explored; this is achieved by continuous improvement, and imaginatively and persistently driving out cost savings throughout the value chain. The cost leaders are good at finding ways to drive out costs effectively while still maintaining their business sustainability. The companies researched by Collins (2001) significantly outperformed their comparison companies within similar industries in the same time frame, and a reason was sought for this superior performance.
Penrose 1995) is searching for something that is inherent in the very nature of any company that either promotes or limits its rate of growth. These publications are exceptionally relevant to the SCAMP, as they are all facing the same challenges, being: ; Competing as investment companies of choice ; Highly dependent on market fundamentals, as they are price-takers. ; Seeking to grow substantially, becoming the preferred platinum company ; Focus on sustainable development. Lessons from industry and company publications
Key drivers in SCAMP economic engines are: ; Primary factors-?metal prices; exchange rates; marketing and market development; robbery quality; ore reserve management, including exploration; cost efficiency of operations; productivity of employees; attracting, recruiting and retaining the right employees; ability to beat inflation, and generate sustainable operating cash flow ; Secondary factors-?political stability globally and locally; speculation within markets, money, oil, gold, etc. Education levels of workforce; national pandemics ; Contributing factors-?historical track record of management to deliver on its obligations and promises; history on paying dividends; ability to reinvest its retained earnings generating further wealth for share holders; ability, and record of generating cost-efficient capital; ability to capture contracts and service them; efficiency and ability to manage cash flow; ability to service debt; grade management of robbery; platinum recovery management, including processing, smelting and refining; sustainability of ore reserves; future earnings/growth; performance culture/ discipline; management’s rating on sourcing good investments, and bring them to fruition, better than anybody else. Entry Costs (at least 5 years before mine becomes profitable) * Infrastructure * Mining license * Transactional costs (governance) * Exploration costs (platinum reef) Speed of adjustment At least 5 years before mine becomes profitable Sunk costs * Exploration costs * Environmental Impact Assessment * R;D * Mining licenses Reputation Leverage brand awareness and reputation across resources Switching Costs * Existing suppliers would have fixed-term contracts in place which could hamper a new entrant who trying to obtain market share.
Gobo restraints * 50% local ownership * Mineral Royalty Act – helps small start ups Offbeat agreements (taboo) * ENEMA – * Environmental Impact Assessment * OSHA * Unions Network Effects Lobbying- Relationships with government and Unions. Would need to build these relationships for the following reasons: * Government – access to mining rights and permits; to have a say in legislation regarding mining sector, corporate social responsibility, health and environmental impact * Unions – need their support related to the supply and cost of labor 2. Power of Suppliers 1 . Supplier Concentration There are fewer than ten producers of platinum in the world.
South Africa accounts or approximately 87% of the worlds known Platinum Group Metal (PEG) reserves (Chamber of Mines of South Africa, Annual Report 2009-2010). 2. Price/Productivity of Alternative Inputs Platinum is mined by only four countries, South Africa, Russia, North America and Zombie. The limited availability of this natural resource keeps the price constantly high across all platinum producing countries. 3. Relationship-specific Investments 4. Supplier Switching Costs Since South Africa accounts for approximately 87% of the worlds PEG reserves (Chamber of Mines of South Africa, Annual Report 2009-2010), the cost of switching to apply that would be experienced. 5.
Government Restraints Eskimos unreliable supply of electricity as well escalating electricity prices puts pressure on the platinum mining industry. Labor laws and unions protect the miners with minimum wage. This, however, is a double edged sword as the industry employs xx of unskilled labor. Putting too much cost pressure on the industry may result in mines closing down and leading to increased unemployment. Other mining industries might not be able to absorb the oversupply of mine workers in the industry. These factors invariably put pressure on the profitability of the platinum industry as a whole. 3. Power of Buyers 1 . Buyer Concentration Auto catalysts account for approximately 50% of total platinum global demand. At present there are no substitutes for this application.
European Union emissions standards are being driven down which results in higher demand for 2-way catalytic converters which uses platinum. Jewelry accounts for approximately 46% of total platinum global demand (Chamber of Mines of South Africa, Annual Report 2009-2010). Also, platinum coins are used as an investment tools as a holder of value. Examples are the Canadian Maple Leaf, the Isle of Man Noble and the Australian Koala dominating the legal tender coin investment sector. 2. Appearance of Substitute Products or Services Jewelry – An increase in the price of gold and silver makes these precious metals more favorable substitutes when platinum prices start to fall. However, if the prices go in opposite directions, platinum demand will increase.
Electric cars – if research and development in this technology takes shape over the next 10 years, demand for autocratically will fall to zero and the industry will collapse POP Morgan, 2008). 3. Relationship-specific Investments 4. Customer Switching Costs At present, switching costs are high due the application of platinum in areas of medicine, electronics, automotive industry, fashion, fuel and energy. Should research and development yield results in favor of alternatives in either of these industries, switching costs will start to diminish in favor of alternatives. 5. Government Restraints Government is leaning towards legislation which promotes the independence on oil and reduces greenhouse gas emissions POP Morgan, 2008).
This implies that demand for platinum will start to fall due to legislation forcing buyers of platinum to turn to alternatives. 4. Industry Rivalry Concentration Existing Platinum suppliers are: * Anglo Platinum – the world’s largest platinum producer, accounts for almost 40% of global platinum production * Impala Platinum Holdings * Looming PL * Northman Platinum * Aquarius Platinum * North American Palladium 5. Substitutes of Complements Substitutes In Jewelry: While rhodium-plated white gold may seem like a cheaper alternative to platinum, it needs to be repeated every 12-18 months to retain its shine. Thus, platinum remains the metal of choice for the diamond engagement ring. Http:// www. Bludgeoning. Com/platinum-uses. SSP Many diamond engagement rings are owe fashioned out of platinum because its luster makes it far superior to gold in bringing out the brilliance of diamonds. As the color (or colorless) grading of diamonds affects its value, diamonds with lesser color grades tends to be slightly yellowish and much less expensive than colorless diamonds. So, unlike yellow gold, a platinum band is desirable for a diamond ring since it does not make the diamond look yellowish and less valuable http://www. Bludgeoning. Com/platinum-uses. Asps (d). PROFITABILITY OF PLATINUM Profits can be defined as the difference between a firm’s total revenue and costs (fixed and variable). According to Baby (2010), a firm’s profits can be looked at from accounting and economic perspectives.
Accounting profits or losses are the difference between the firms total revenue and explicit or rand costs and are shown on the company’s balance sheet. Economic profits on the other hand also incorporate the opportunity cost of the investment (explicit an implicit). Thus, the presence of profits signals to owners of resource holders where they are most valued by society. In a competitive environment, the existence of profits guides the decisions about resource deployment, with priority being given to industries which are most refutable. This is not necessarily the case in monopolistic and oligopolies industries, where there are barriers to entry. High profit margins in these industries will not result in the influx of new firms.
According to the Porter’s Five Forces Framework (Baby, 2010), barriers to entry come in different forms such as entry costs, speed of adjustments, existence and size of sunk costs, economies of scale, network effects, etc. In the mining industry, mineral endowments also play a big role in restricting entry by potential firms. For instance, platinum is only found in very few countries worldwide. In countries such as Zombie, entry barriers also come in the form of transactions costs. The Zimmermann government has passed a law which strictly requires foreign owned companies to cede 51% of their shares to locals. In South Africa there are proposals to nationalize the mining industry.
The Mineral Royalties Act in South Africa which came into effect in March 2010, also requires mining companies to pay royalties directly to the government, thereby affecting the cost structure and profitability of the industry. These factors result in relatively few firms in the platinum mining industry. The platinum industry is, therefore, not perfectly competitive, but rather more unapologetically competitive. According to Van Deer Berg (2008), platinum prices are Additionally, the nature and different qualities of platinum allows for product differentiation. The platinum mining industry has been very profitable over the past two decades, despite the volatility in global mineral prices. In this analysis, profitability trends were computed using the three biggest mining companies in South Africa as case studies. This was based on a number of factors.
