According to Wikipedia: 1,000 cubic centimeters of 99.9% pure platinum, worth about US$970,600 at 14 July 2012 prices. Photo by Stephen B Streater, public domain.
9 June 2014
Like any good question, the answer to whether the platinum producers can afford the demands made by striking workers is: “it depends”.
In fact, it depends upon a great many complicated factors: the movement of the platinum price, the future of platinum demand, the availability and price of substitutes to platinum, the changing nature of the rock mined, and so on.
Without tackling all of this can we say something sensible on affordability?
A recent study authored by Andrew Bowman and myself, analyses the question in light of the fortunes of the industry over the last fourteen years (2000 – 2013). The past is not a perfect guide to the future but the exercise is worthwhile for three reasons.
First, the platinum producers have been successful at creating a public debate in which we view affordability only in light of the state of the sector over the last two years. They argue that they are cash strapped and that wages account for a large share of their expenditure. This is true, but it has not always been true.
Second, the sector clearly needs a holistic long-term plan. An analysis of the past is essential in setting the course forward.
Third, our sample period includes both a boom and a bust and so gives some indication of the average fortunes of the sector. The past can shed some light on the question of affordability in the future.
It is remarkable how well the companies did, on average, over the last fourteen years (in particular during a boom period between 2000 and 2008), how their shareholders raked it in and how labour got a very thin slice of the pie.
The operating profits, between 2000 and 2008, of Amplats, Implats and Lonmin were 37%, 44% and 41% respectively, more than double the JSE Top 40 average of 16%. For the period as a whole it was 26%, 37% and 29% still well above the average of 17%. The “return on investment” (another measure of how well a company is doing) was at times 10 to 20 times higher than what is considered, by experts, a more than fair return for South African mining houses.
During the boom period shareholders made a killing, taking home hefty dividends (funds distributed to shareholders) and enjoying as much as a twelve-fold rise in the share price, again far in excess of the JSE Top 40 (the forty biggest companies on the Johannesburg Stock Exchange).
Workers on the other hand, reaped few of the benefits. Looking at “value added” (which can be thought of as the monetary value left after paying for all the costs of production) tells an interesting tale. In South Africa as a whole 51% of value added, on average, goes to labour; during the boom years on the platinum belt labour got only 29%. For the period as a whole it was 38%. This is the time when wage demands should have been pushed, when it would have been easy to argue that labour deserved a bigger slice of the pie, unfortunately NUM was asleep at the wheel or in bed with the bosses.
Looking at offers and demands we see that the platinum producers offer is less generous than they claim, and AMCU’s demand more modest than the producers allege.
The total wage package is made up of the basic wage, various allowances, and benefits such as pension and medical. Both the offer and demands require higher percentage increases for the basic wage (or cash remuneration) and include higher increases to those currently earning the least. This may be a justified approach. However, when we analyse the offer and demands we need to look at the percentage increases for the package overall (the total cost to company) and the increases for all three wage bands (the lowest paid A-Level, and the B and C Levels).
The most generous interpretation of the producers’ offer amounts to an overall increased wage cost to the company of between 7.7% and 8.9%. Considering that wages would normally increase inline with inflation, around 6%, anyway, the offer is not a massive extra burden to the company.
Repeating the exercise for AMCU’s demand of a R12,500 basic entry-level wage (currently around R5,000 – R5,500) to be achieved over four years we see that the demands mean a 13% to 15% increase in overall wage costs to the company (for A, B and C level workers). The claim by the producers that these demands amount to a 30% to 40% yearly increase is flatly false!
In light of past performance we ask: hypothetically could funds have been switched to favour higher wages and lower distributions to shareholders? And if so how dramatic would the shift be?
We need to measure the cost of the increases over and above inflation because wages would go up in line with inflation anyway. We can evaluate this extra expense in two ways.
On average over a four-year period we see that wage demands come to 20%, 22% and 55% of dividends paid to shareholders for Amplats, Implats and Lonmin respectively. This means that between 2000 and 2013 if the shareholders of Amplats and Implats received a fifth less than they did, this could have covered the demanded wage increase. For Lonmin it is much higher.
But is this fair? Shareholders require a decent return on their investment.
We then took the amount of money distributed to shareholders over-and-above the JSE Top 40 average and compared this to the wage demand. For Amplats and Implats we found that this “excess” could comfortably cover the wage increases and the company would still be able to distribute billions more to their shareholders than the shareholders of other JSE Top 40 companies received. For Lonmin this was not true.
The method is imperfect and only offers an indicative answer. The future won’t be an exact repeat of the past, and wages are a yearly cash cost while dividends are paid only when the company does well. But overall the analysis indicates a situation in which the companies are placing the short-term interests of their shareholders above all else, at the expense of a fair wage for the mineworkers, and resulting at times in extravagant payouts to shareholders.
Our analysis threw up bigger questions.
How do we ensure that the country as a whole benefits from our mineral wealth, especially during booms?
One answer to this is what is called a Resource Rent Tax (RTT). It is an extra tax that is applied to “super-profits” in the mining sector during booms like that of 2000 to 2008. This boom is not the result of special innovation by the mining houses but occurs because of strong global demand and the price of the mineral. The minerals belong to everyone and so the country should receive more during such booms.
Then there is the question of mechanisation: will the mining companies buy machines to do the mining if wages go up? Despite what we hear in the press, the answer is not a straightforward yes; Lonmin tried this already and failed. But to some extent this will probably happen.
Finally, there is the question of industrial policy: how do we create industries linked to mining so that mining has beneficial ripple effects across the economy?
There are some clever answers to these tricky questions, many in the ANC’s 2012 Strategic Intervention in the Mining Sector policy document, but is there the political will to act on them? The sector is likely to undergo a significant restructuring and if this is not carefully managed everyone will lose.
We must view the findings here with caution. I will not say, “The platinum producers can afford the increase,” but if the past is a guide to the future then labour demanding a larger slice of the pie seems perfectly reasonable. We must also view the producers’ claims with a healthy dose of skepticism. The platinum price is up and demand is running way ahead of supply. The future is not as bleak as they would have us believe.
Finally, government needs to intervene not only to find a fair resolution to the strike but also to chart a way forward for the sector as a whole. Mining capital must be forced to play ball. The public debate needs to take greater cognisance of all the facts, with a long-term view in mind, and deal with the broader issue of how best to manage our mineral resources to ensure all enjoy in the benefits they bring.
Gilad Isaacs (@GiladIsaacs) is an independent economist and researcher. He is co-author of a report titled Demanding the Impossible? Platinum Mining Profits and Wage Demands in Context. He writes in his personal capacity, and not behalf of the organisations publishing the report or his co-author.