A platinum producers’ cartel is not practical

SOUTH Africa has more than 80% of the world’s known reserves of platinum group metals. Most of the rest is found in Zimbabwe or Russia. Platinum producers are price-takers, the prices of platinum metals being determined daily by changes in supply and demand on global markets. With resources concentrated in so few hands, the possibility of a cartel of producing nations, along the lines of the Organisation of the Petroleum Exporting Countries (Opec), has often been suggested as a way of ensuring higher prices.

Limiting metal supplies to boost prices is more difficult than it seems. In any cartel, individual producers have a strong incentive to cheat. Although all benefit from restricted supply in the market, individual producers want to increase their own production (and profit), while leaving it to others to reduce supply. Output within cartels inevitably grows because more and more producers cheat. The result is that prices then fall.

Opec is portrayed as a successful model the platinum industry could replicate. In fact, its track record is not impressive. Initially, it significantly increased global oil prices, but members soon started to exceed their production quotas. As a result, the oil price was for a long period actually lower in real terms (adjusted for inflation) than it had been before Opec’s formation. In 1998, oil fell to less than $10/barrel. Subsequent sharp rises in the oil price have much more to do with rapid demand growth from China, as well as political troubles in Iraq and Iran, than efforts by Opec to control prices.

There are important differences between the global platinum and oil markets. Platinum is produced mainly by three private South African miners. It is illegal for private firms to collude to restrict production. Even if the South African government supported such collusion, it would attract immediate legal sanction from producers abroad. Oil is produced in Saudi Arabia by a government-owned company. As the world’s largest oil producer, the Saudi government can attempt to influence global supply by lowering or raising production without legal penalties.

Curtailing oil production does not automatically result in job losses. Cutting platinum production means closing mine shafts, with resultant job losses. Neither the trade unions nor South Africa’s government are willing to accept such a trade-off for higher platinum prices. To control platinum metals supplies legally, South Africa’s government (possibly together with the governments of Russia and Zimbabwe) would need a centralised marketing body through which producers are all forced to sell. When the platinum price is low, such a body could build up stocks to limit available market supply. It could sell its stocks in times of metal shortages. But doing this is very expensive. At times, this body might be forced to hold billions of dollars of unsold stocks. The government would need to fund these purchases. It is unlikely that such funding would be forthcoming or that it would be a wise use of limited government resources.

Moreover, the establishment of a body to hold excess metal supply would give private producers free rein to increase production without any fear of lowering prices. Increased production would have to be bought by the centralised marketing body to prevent prices from falling. Governments would be subsidising the expanded profits of producers.

Equally important is the effect that centralised control of supply could have on platinum demand in the long term. The platinum group metals are used mainly in catalytic convertors to reduce emissions from motor vehicles. Manufacturers use a combination of platinum and palladium to achieve nationally determined emission standards. Continuing efforts to improve the cost-efficiency of the convertors has meant reduced usage of both metals over time. The higher the prices of platinum and palladium, the greater the incentive to find new technologies that further reduce metal consumption. There is also an increased imperative to recycle existing metal instead of buying new production.

Global vehicle manufacturers cannot allow a situation to develop in which production is held hostage by state-controlled suppliers that restrict future access to required platinum metals. Nor can they allow the cost of the catalytic convertor to become an ever-increasing proportion of the total cost of a new car. Merely the threat of this would create a huge incentive to develop new technologies. The strikes in the platinum mines are already creating the same incentive. If SA is seen as an unreliable supplier, vehicle manufacturers will seek alternatives.

Restricting supplies is therefore not the answer to the platinum industry’s woes. It is production costs that must be brought under control. And new uses for platinum metals should be identified to boost global demand. This would create the happy market situation in which prices are strong and metal production grows simultaneously. South Africa will benefit the most from such an outcome.

By Gavin Keeton

Picture: THINKSTOCK

Keeton is with the economics department at Rhodes University.

Source: Business Day