Rand, Energy Costs To Limit Platinum Expansion-Johnson Matthey

The platinum industry is constrained by a strong local currency in South Africa and the possibility of rising energy costs there, and these factors will limit future expansion, metal fabricator Johnson Matthey PLC (JMAT.LN) said Tuesday.

Energy costs and rand strength won't reduce output but will limit expansion, Johnson Matthey general manager Peter Duncan told Dow Jones Newswires.

"The ability to grow will be a big issue going forward," he said.

South Africa is the world's largest platinum producer and its currency has strengthened, hitting miners' profits.

"The rand is almost as important as the metal price," Duncan said. "Since March, miners haven't seen any of the rise in the platinum price as a result."

In addition, South African state utility Eskom Holdings Ltd. has applied to increase average electricity prices by 45% a year for three years to help cover rising costs and the expansion of its generating capacity. Utility costs account for 25% to 30% of mining costs, while labor costs account for 50% to 60%, followed by equipment costs and then utilities.

"I don't think an increase in Eskom prices will affect production," Duncan said. "The impact is on new projects. Payback is harder if costs go up so it will affect companies' ability to expand."

And while energy isn't the biggest cost for miners, "it's not going to get easier to mine. We've seen retrenchment of higher-cost production already but [we] don't expect more and instead expect better productivity," Duncan said.

Johnson Matthey said the global platinum market will likely move into deficit in 2010 unless "something unexpected happens."

This year it estimates the platinum market was in a 140,000-ounce surplus.

Next year some already planned expansion projects will come online, Duncan said, at Platinum Australia Ltd.'s (PLA.AU) Smokey Hills project, Platmin Ltd'.s (PPN.T) Pilanesburg mine and Blue Ridge Mining. Together they will add 90,000 ounces next year, eventually rising to 160,000 to 170,000 ounces a year.

-By Devon Maylie, Dow Jones Newswires; [phone]; [e-mail]