Sustainability of platinum production in South Africa and the dynamics of commodity pricing

Abstract

Against the backdrop of potential reliable and sustainable future production of platinum for export in South Africa, this article sheds some light on the dynamics of commodity pricing, specifically with respect to the recent low platinum price. In this regard, a structural vector autoregression (VAR) was applied to observe the sensitivity of the platinum price and future pricing due to changes in macroeconomic variables, but also to review changes in macroeconomic variables due to changes in the platinum (commodity) price. The variables used for decomposition were the platinum price, the oil price, the real effective exchange rate of the United States (US), the US Federal funds rate, and total combined gross domestic product (GDP) of the Organisation for Economic Co-operation and Development (OECD) countries. Impulse response functions, with shocks to each system were investigated, and the forecast error variance decomposition was examined. The main results were that a shock to OECD GDP results in a platinum price increase, that is, a positive correlation between output and the platinum price. A shock to the oil price causes the platinum price to spike in the short term, then decrease over the medium term, then move sideways in the long term. A shock to the US Federal funds rate makes the platinum price spike in the short term, then decrease over the medium term and move sideways over the long term. Finally, a shock to the real effective exchange rate of the United States causes the platinum price move sideways. The dynamics of commodity pricing is important to ensure platinum sustainability in the future, fostering capital investment within a corrective policy environment. The present research could serve as a guide for possible early and therefore less dramatic interventions. At best, in normal circumstances, with a fully functioning labour force, the research could help achieve expected planned reliable production going forward, and at worst, it provides the necessary stimulus for future research and a review of predictions made.