* South African platinum output down 7 percent in 2016
* Spot prices still languishing below $1,000/oz
* GRAPHIC-2017 asset returns: tmsnrt.rs/2jvdmXl
By Jan Harvey and Zandi Shabalala
LONDON, May 17 South Africa's platinum output is
grinding lower as producers cut capital expenditure and shutter
unprofitable areas, but it is not happening fast enough to
tackle the industry's bigger problem - rock-bottom prices for
the metal itself.
Platinum prices in dollar terms are up just 4 percent this
year in the face of a much bigger rally in other precious metals
like palladium and gold, and are 32 percent below their 10-year
average of $1,375 an ounce.
In rand terms, they have fared even worse this year, pushing
into the red as the rand strengthens versus the dollar, eroding
what little support the miners had.
That is not making the sector particularly attractive for
investors, with the Johannesburg platinum index
underperforming the main stock index this year.
That reflects the failure of the sector to respond more
dramatically to the economic realities of falling prices while
also battling a strengthening rand and regulatory uncertainty.
Some producers see a need for a much-needed shakeout which
has yet to happen.
"Current metal prices cannot sustain the industry," said
Johan Theron, spokesman for world no. 2 producer Impala Platinum
"Without the required price support the industry will
inevitably contract and restructure to the point where a new
equilibrium is found with the requisite price support at a lower
That restructuring is a long time coming. Despite pressure
on the sector and cuts from the top five producers through 2016,
South African platinum mine output was still marginally above
2013's level last year.
Lonmin , the world's third largest platinum
producer, shut between 100,000-160,000 ounces over the last 18
months from its high-cost shafts.
"We believe the industry needs to be more disciplined in
reducing the high cost production and Lonmin is doing its part,"
chief executive Ben Magara said on Monday.
Lonmin was saved from the brink by a rights issue in late
2015 at a 94 percent discount. South Africa's Public Investment
Corporation (PIC) upped its stake in the company after the issue
That saved the company but did little to placate market
watchers who had suggested that the loss of a major producer
could help the rest of the industry by sending prices higher.
"The continued existence of Lonmin is of the utmost
importance and we therefore expect all stakeholders to continue
to support Lonmin with its turnaround strategies and cost
cutting initiatives," said Deon Botha, PIC's head of corporate
Closing shafts and laying off workers is politically
difficult in a country where unemployment is running at 26
percent - a fact recognised only too well by potential
"Investors (are) reluctant due to the political situation,
with mining jobs being protected over mine efficiencies," said
asset manager London & Capital's head of equities Roger Jones,
whose fund has no exposure to the sector.
Ian Woodley, a fund manager at Old Mutual Investment Group,
said poor returns from the sector had at times been overlooked
in recent years both by investors taking the long view, or for
"less economically minded" reasons.
"Within South Africa no one has the desire the push one of
these companies to the wall, because of the social unrest it
would cause, and the hardship to many thousands of people," he
"It's kind of viewed, rather than an economic sector, almost
as a social sector."
The fund has cut its exposure to South African platinum
producers over the past few years, he said, though it keeps a
There are still those who are prepared to make big bets on
South African platinum. South Africa's Sibanye Gold did
so when it bought Anglo American Platinum's labour-intensive
mines and Aquarius Platinum in 2015.
Spokesman James Wellsted nonetheless recognises problems
within the industry, which he said was guilty of not managing
supply by carrying loss-making ounces and shafts.
"You can't subsidize loss-making production with profitable
shafts," Wellsted said, referring to a common lever miners pull
to keep desperate shafts running.
Despite cost cuts, around 30 percent of global platinum
output - some three-quarters of which comes from South Africa -
is still under water, GFMS analysts at Thomson Reuters say.
Taking this out the equation would seem certain to lift
prices regardless of demand, but investors are not betting on
(Editing by Ed Osmond)