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Mining pay should reflect rise and fall of profits

Date Released: Mon, 7 July 2014 13:00 +0200

THE five-month platinum strike is thankfully at an end. Producers and workers must now focus on recovering as best they can. It will take some time before production returns to normal. Workers will struggle for years under the burden of debt incurred during the strike. Those mines that were already losing money before the strike will be in a much more perilous financial condition. Reduced long-term production and job losses are likely.

If the agreement, which lasts three years, is to hold and future work stoppages avoided, there must be structural change in the industry. Most important, how workers’ pay is determined needs to change.

Several commentators have noted that when the platinum price was high, most of the benefit of higher profits went to the mine owners. This is inevitable when the only form of worker remuneration is a fixed monthly wage. Wages need to include an element based on profits.

Platinum mines are price takers. The US dollar prices of the platinum group metals they produce and sell are determined by changes in global supply and demand. Relatively small changes in either supply or demand can lead to big price changes. As a result, prices are volatile.

A further vagary is the rand-dollar exchange rate. The rand price of platinum metals is all-important to South African producers as all of their costs are in rands. The rand is even more volatile than platinum prices. As a result, nobody can predict what the rand platinum price will be six months from now, let alone at the end of the three-year wage settlement.

Producers are therefore unable to forecast their future revenue accurately. They must try to keep costs from rising so as to ensure future profitability should prices fall. If they cannot do this — or the platinum price falls even further than they imagined — they will make a loss.

Loss-making producers must still pay their bills. Mining assets need continually to be replaced as ore bodies are depleted, so even loss-making producers must keep investing in new shafts and tunnels simply to stay in business. This can be funded only if the loss-making producer can persuade banks to lend it money. Alternatively, it must persuade its shareholders to inject new funds into the business to cover its losses.

Shareholders will do this only if the loss-making mine can convince them it will soon return to profitability. Usually a plan to return to profitability will involve severe cost cutting — which means shedding jobs. No bank and few shareholders will be prepared to put money into a loss-making mine in the vague hope that the platinum price will rise sometime in the future.

Because mines struggle to contain costs sufficiently to ensure modest profits when prices are low, there is a constant tussle between employers and unions for competing shares of a relatively small pie. If prices suddenly rise, shareholders and the taxman enjoy all the upside. Employers are reluctant even then to grant generous wage increases that would be unaffordable were prices to fall subsequently.

A mechanism needs to be built into the system so that producers (and their workers) are cushioned from the effects of falling prices, and to ensure that workers get to share in the good times when prices recover. This requires that wage rates be linked to profits rather than costs. This means that bonuses and/or profit sharing must become an important part of overall remuneration. In this way, workers would receive a fixed wage set at a level to ensure business is a going concern when prices are low.

When prices and profits rise, workers should receive additional pay based on an agreed share of the consequent profits. Such an arrangement requires a substantial departure from present industrial relations practices.

Employers and unions need to see themselves as partners, not enemies. Shareholders must be willing to give up some of the potential upside when prices rise in favour of greater stability across the price cycle. Unions, too, must reimagine their role. They oppose multiyear wage settlements because they fear this reduces their influence as worker representatives. They want to be seen as responsible for winning the increases workers receive. They fear that increases determined by profits reduces their role.

Is such co-operation possible? The mining industry has surprised South Africans before. It was the site of the most intense (and violent) labour strife in the 1980s. Yet out of that emerged the National Peace Accord that, in many ways, created the safe political space in which South Africa’s successful transition to democracy was negotiated. Such a turnaround required visionary leaders such as Cyril Ramaphosa from the unions and Bobby Godsell on the side of employers.

Time will tell whether either the unions or employers still have leaders with their vision and courage.

By Gavin Keeton

Source: Business Day

Keeton is with the economics department at Rhodes University.

 

Source:Business Day