Gaylor Montmasson-Clair,

Trade and Industrial Policy Strategies (TIPS)

TIPS Forum 2016UJ, Johannesburg, South Africa, 14-15 June 2016

1. Introduction

2. The platinum value chain in South Africa: A global but fragile positioning

3. Energy: a factor of vulnerability to climate change response measures

4. Energy: The core of platinum mining companies’ climate mitigation strategies

5. Platinum: A low-carbon energy solution

6. Conclusion

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The climate change agenda is increasingly prominent and unavoidable, both internationally and domestically

Against that trend, South Africa’s economy is historically structured around:

◦ the affordable and abundant supply of coal-based electricity and

◦ the domination of energy-intensive mining value chains

Global dynamics in the climate regime and South Africa’s domestic evolution therefore appear in frontal opposition

Going forward, this is set to be an increasing stumbling block to socio-economic development

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Climate change and industrial policies ought to be developed in a symbiotic fashion in order to embark on the transition towards a competitive, climate-compatible economy

It requires a strategic vision for the economy, based on an understanding of:

◦ the short-, medium- and long-term costs and benefits as well as

◦ the risks and opportunities associated with the status quo and the transition

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Climate change is not so much an environmental problem, but a socio-economic issue questioning the purpose, shape and features of industrial activities.

Demand for platinum has significantly grown from the 1970s with the introduction of air quality regulations

Main drivers have been:

◦ the production of autocatalysts

◦ jewellery making

◦ more recently, industrial/medical usages and investment purpose

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Autocatalyst Jewellery Chemical Investment Other applications

Global demand of platinum from 1975 to 2013 (in tonnes)Source: Author’s composition based on data from Johnson Matthey

SA benefits from 96% of known global reserves of PGMs

SA is by far the largest producer: 72% of production excluding recycling (and 53% including recycling)

Global Top 3 producers: Anglo American Platinum, Impala Platinum and Lonmin

But recent decline in market share due to recycling (16pb in 10 years)

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1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

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Global production of platinum from 1975 to 2013 (in tonnes)Source: Author’s composition based on data from Johnson Matthey

4.1% of SA’s GDP (1.9% directly and 2.2% indirectly) in 2012

Mineral sales growth accounted for 5.2% of GDP growth, of which 43% came from the platinum sector

Largest revenue generator of mineral exports, making up 27% of mineral export earnings

7-15% of SA’s exports over the last 15 years

Largest employer in the mining sector (26% of all mining employment, directly employing more than 190 000 people in 2013)

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Export sales (left axis) Local sales (left axis) Number of employees (right axis) Earnings (left axis)

Numerous economic linkages with the rest of the economy:◦ Backward: input suppliers,

OEMs, engineering and project management firms

◦ Forward: fabricators, such as industrial manufacturers, especially the catalytic converter industry, and jewellery producers

◦ Other: R&D, infrastructure, etc.

Evolution of South Africa’s production (in kg), employment and earnings

Source: Author’s composition, based on data from the Department of Mineral Resources

Rapid drop in the price, and limited ability to influence prices

Average cost of producing an ounce: +18% p.a. over the past 5 years

Increasing operating costs: labour/wages, materials/consumables, energy

Infrastructure constraints: energy, water

Policy and regulatory uncertainty

Catalytic converter industry: increased international competition and progressive lose of support from SA government

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Anglo American Platinum (left axis) Impala Platinum (left axis)

Northam Platinum (right axis) Lonmin (right axis)

Aquarius Platinum (right axis)

Evolution of platinum prices from 1994 to 2015

Source: Author’s composition, based on data from kitco

Profit after taxation for Anglo American Platinum, Impala

Platinum and Northam Platinum (in ZAR million) and Lonmin and Aquarius Platinum (in USD million)

Source: Author’s composition, based on data from companies’ annual reports

A lose-lose starting point: An energy-intensive industry in a carbon-intensive energy system

SA is one of the most carbon-intensive economies in the world, a result of fossil fuel-based energy supply systems (87% of emissions)

Industrial activities are however significant energy consumers, indirectly driving GHG emissions.

The platinum mining sector alone consumes about 5% of Eskom’s annual electricity output (mining: 15% and industrial: 25%)

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ZMBTZA DRC MOZ NAM BRA BWA PER GER TUR MEX JPN

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Carbon intensity per country (in kgO2e per GDP (2011 USD) based on purchasing power parity)

Source:

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Due to the underground nature of platinum mining operations, electricity represents a considerable share of companies’ energy consumption (70-80%) well ahead diesel, coal and gas

Energy is largely an uncontrollable factor of competitiveness

◦ Energy supply is controlled at the national level

◦ Energy use is heavily dependent on the ore grade, the depth of mines and the limited variability of power use

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Platinum

Impala Platinum Lonmin Northam Platinum Ltd Royal Bafokeng

Platinum Ltd

Aquarius Platinum

2008 2009 2010 2011 2012 2013 2014

Global GHG emissions (Scope 1 and Scope 2) for main platinum companies operating in South Africa (in tCO2e)

Source:

Author’s

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data from the CDP

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Carbon intensity Energy intensity

Global GHG emissions (Scope 1 and 2) (in tCO2e and tCO2e per ounce of PGM) and energy intensity (in GJ per ounce of PGM) from SA’s top platinum companies

Source: Author’s composition, based on data from the Carbon Disclosure Project and companies’ annual and sustainable development reports

The impact of climate change regulation constitutes animportant area of concern for the international competitivenessof South Africa’s platinum value chain.

Mining value chains would be the most impacted sectors fromthe implementation of carbon pricing domestically

◦ Reduced output, employment, investment, etc.

South Africa’s platinum value chains may face increaseddifficulties in accessing foreign markets, including financialflows

◦ High trade exposure (distance to market + high ratio of tradeto production + high carbon content of exports)

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As a result, South Africa’s vulnerability, which is not diminishedby scale or production volumes, appears relatively highcompared to most other countries

First port of call: a better understandingof emissions sources

Low-cost, non-disruptive interventions

◦ Process optimisation (air andventilation, operationalimprovements, equipment withimproved power factors)

◦ Energy efficiency in non-coreoperations (lighting, solar geysers)

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Energy savings Investment Ratio (right axis)

While the transition at the energy supply level constitute the mainmitigation strategy, performance improvement at the firm level areparticularly important.

◦ In the short term, the mitigation potential is greater at the industrial levelthan at the energy supply stage

◦ Most of the mitigation potential at the industrial level benefits fromnegative marginal abatement costs

Source: Author’s composition, based on data from Lonmin

Lonmin’s energy-related initiatives from 2007-2012 per type

Larger, more disruptive technological changes by junior producers

◦ Pallinghurst has made pronounced improvement to the company’sperformance through a patented smelting technology, the Kell process.The new process only requires 14% of the electricity used byconventional techniques.

◦ Braemore Platinum, is implementing for the first time the ConRoastprocess. The innovative process allows the use of cleaner, direct currentarc furnaces, a more efficient and cost-effective production process

New shaft designs are also being explored by some companies to improveperformance and resource use.

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The new frontier: Alternative sources of energyBiomass thermal power plant (Anglo American Platinum), Solar PV systems(Anglo American Platinum, Lonmin), Hydropower, Fuel cell systems (AngloAmerican Platinum, Lonmin), Cogeneration (Anglo American Platinum),Biofuels (Anglo American Platinum, Impala)

While the net impacts of a low-carbon development path on platinumvalue chains remain largely unknown, market trends are likely togenerate numerous new opportunities

Fuel cells have the ability to generate and store power by combining afuel (usually hydrogen) and oxygen from the air to produce electricity,heat and water

The demand for fuel cells is expected to pick up from 2020,rapidly becoming the main driver for platinum in the future

◦ Fuel cell electric vehicles are forecasted to capture about a quarter ofthe light duty vehicle market by 2050. This could equate to a 250%increase in the demand for platinum over the period

◦ Toyota, Hyundai, Honda, Kia, Nissan, Ford and Daimler, BMW…

◦ Germany, Japan and California in the USA have started the initial roll-out of hydrogen refuelling infrastructure

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Platinum mining companies are heavily investing in R&D, inassociation with leading international companies.

◦ Anglo American created the PGM Development Fund in 2009(USD 10 million initially + USD 100 million from 2014-2019),with a strong focus on energy

Hydrogen fuel cell systems are also considered “cost-effectivereplacements for conventional batteries or diesel engines inunderground mining vehicles”

The SA government aims to supply 25% of the global demand forhydrogen fuel cell catalysts by 2020.

◦ Hydrogen South Africa

◦ Platinum Special Economic Zones in the North West Province

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The development of fuel cell technologies in SA is neverthelessnot without challenges.

The size of this opportunity associated with fuel cells will depend on arange of unpredictable variables

◦ oil prices, the development of the wider hydrogen economy, the reduction ofproduction costs, further technical and technological improvements to widenpossible usages, future developments around diesel engines, hybrid cars andother energy technologies and the availability of platinum

South Africa is not the only economy investing significant effort in thedevelopment of a local fuel cell industry.

◦ Leading firms in the fuel cell industry originate from countries, such asthe USA, Canada, Japan, South Korea, China, France, Denmark,Germany and Sweden

SA’s efforts to promote the development of fuel cell manufacturingtherefore appear rather limited and a 2014 review of HySA highlightedkey weaknesses

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Whether or not such a shift will be an opportunity or a threat toSouth Africa’s platinum value chains is not definite at this stage.

This will largely depend on the ability of the industry, incollaboration with the South African Government and otherrelevant stakeholders, to position local firms preferably in termsof:

◦ Supply dynamics: complete overhaul of energy systems fromenergy supply to energy use

◦ demand dynamics: business case for fuel cells

◦ competitiveness dynamics: establishment of a competitive, low-carbon value chain in South Africa

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The domination of South Africa over platinum reserves does notguarantee a strong role in the fuel cell industry. Active efforts willbe required to promote competitive (on economic, but also socialand environmental fronts) manufacturing in South Africa.

Trade and Industrial Policy Strategies

Supporting policy development

through research and dialogue

www.tips.org.za

Gaylor Montmasson-Clair

Assistant Programme Manager: Sustainable Growth

gaylor@tips.org.za

+27 12 433 9340