Input cost and international demand effects on the production of platinum group metals in South Africa Corris Krogscheepers, Sean Joss Gossel n University of Cape Town Graduate School of Business, South Africa article info Article history: Received 7 October 2014 Received in revised form 30 April 2015 Accepted 30 April 2015 Keywords: Demand Input costs Platinum group metals Production South Africa abstract This study uses a VECM with impulse response, variance decomposition and block Granger causality analysis to investigate the effects of international and domestic factors on the production of platinum group metals (PGM) in South Africa from 1980 to 2011. The results of the impulse responses show that shocks to the international factors negatively affect production while domestic shocks positively affect production. The variance decompositions find that in the long-run, production is most significantly impacted by international demand, domestic electricity tariffs, and salary shocks. The block Granger causality analysis further finds that the international factors causally affect the domestic factors, but production is driven by PGM price fluctuations, electricity tariffs, and output per employee. & 2015 Elsevier Ltd. All rights reserved. Introduction Mining plays a pivotal economic role in natural resource rich South Africa. In 2011, the mining sector, accounted for 8.8% (USD35.9 billion) of national GDP, 20% of private sector invest- ment, 12.3% of total investment and 29% (USD192.8 billion) of the All Share Index (ALSI) of the Johannesburg Stock Exchange (JSE) (Chamber of Mines, 2012). The rising prices of platinum group metals (PGM) 1 since 2000 has led to PGMs replacing gold as the key mineral export of South Africa (Walker and Minnitt, 2006). The total PGM export sales value for 2011 was USD10.1 billion, whilst gold accounted for USD9.0 billion (DMR, 2012). There are more than 30 mines operating in the Bushveld Igneous Complex (Klopper, 2011), employing 194,000 people directly (DMR, 2012). Currently the three largest PGM mining companies in South Africa, in terms of production, are Anglo American Platinum, Impala Platinum and Lonmin. These three mining companies have operations which span the three types of PGM ore. However, South Africa has experienced various challenges in the mining sector in recent years, which have been amplified due to cost and social circumstances (Kane-Berman, 2011). Consequently, some operations have either been discontinued or ‘moth-balled’, whilst capital expenditure has been deferred or restricted until market conditions improve 2 (Anglo American Platinum, 2012a; Impala Platinum, 2012a; Klopper, 2011; Lonmin, 2012). Hence, this study investigates the effect of international (demand and price) and domestic (salaries, electricity tariffs, and output per employee) factors on the production of a PGM unit mined in South Africa from 1980 to 2011. The remainder of this study is organised as follows. Section 2 reviews the literature associated with PGM sector costs. In Section 3, the empirical model and methodology are discussed. Section 4 sets out the data utilised to conduct the empirical investigation. The empirical results are then presented in Section 5, and the study concludes with a discussion of the key findings and PGM sector policy implications in Section 6. Literature review Operating costs in the PGM sector consist primarily of day-to- day costs associated with the production and processing of the commodity. These costs include wages, consumable material such as chemicals and explosives, transportation, electricity and fuel Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/resourpol Resources Policy http://dx.doi.org/10.1016/j.resourpol.2015.04.009 0301-4207/& 2015 Elsevier Ltd. All rights reserved. n Corresponding author. Tel.: þ27 21 406 1027/27 72 521 2872. E-mail address: gosselse@gsb.uct.ac.za (S.J. Gossel). 1 Platinum Group Metals/Minerals (PGM) refer to the accessory bearing mineral in which Platinum Group Elements (PGE) are found. PGEs consist of the following elements, ruthenium (Ru), rhodium (Rh), palladium (Pd), osmium (Os), iridium (Ir) and platinum (Pt) in varying ratios (Xiao and Laplante, 2004). 2 Examples include: Anglo American Platinum capital expenditure rationed from USD1.1 billion to USD877 million (Anglo American Platinum, 2012b); Impala Platinum approved USD170.5 million for expenditure for 2013 for the Leeuwkop Project but then restricted this amount to USD31.8 million (Impala Platinum, 2012b); and Lonmin deferred spending on Hossy, K4 and Saffy shafts (Lonmin, 2012: 11). Resources Policy 45 (2015) 193–201