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A South African Platinum Group Metals Exchange This publication was produced with the support of the Department of Science and Innovation (formerly the Department of Science and Technology). science & innovation Department: Science and Innovation REPUBLIC OF SOUTH AFRICA A South African Platinum Group Metals Exchange Policy Rationale for Financial Beneficiation Edited by Iraj Abedian All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without prior permission from the copyright holder. Copyright © MISTRA, 2019 ISBN 978-0-620-85956-1 Text Editor: Tracey Hawthorne Proofreader: Valda Strauss Designer: Triple M Design Set in 11/15 pt Minion Pro Printed by Hansa Print Please cite this publication as follows: MISTRA. 2019. A South African Platinum Group Metals Exchange: Policy rationale for financial beneficiation. Iraj Abedian (ed). Johannesburg: Mapungubwe Institute for Strategic Reflection. This publication was written by the following researchers: Dr Iraj Abedian (Editor) Chief Executive, Pan-African Investment and Research Services Trudi Hartzenberg Executive Director, Trade Law Centre John Stuart Research Associate, Pan-African Investment and Research Services JSE Limited Themba Moleketi Independent Researcher Njabulo Zwane Junior Researcher, Mapungubwe Institute for Strategic Reflection Neale Baartjes Director, Mineral Economics & Resources, EcoPartners (Pty) Ltd Khensane Hlongwane Independent Researcher Duduetsang Mokoele Researcher, Mapungubwe Institute for Strategic Reflection Lyndall Mujakachi Independent Researcher Contents Preface ix Acknowledgements xiii Abbreviations xv Introduction: Project background and policy context 1 1. Overview of the regional political economy of the PGM sector 27 2. Commodity exchange: A strategic industrial policy initiative 57 3. Value-chain analysis of the PGM exchange 72 4. A quantification of PGM trade: Spot and futures markets 96 5. Financial, technical and logistical requirements associated with a PGM exchange 134 6. Some key macroeconomic considerations 147 7. South Africa’s PGM exchange: A proposed action plan 172 Appendix 1: Uses of PGMs 181 Appendix 2: Futures contracts comparisons 191 Appendix 3: SAM income distribution impacts 195 Preface The journey of this research report started in August 2013 when the Mapungubwe Institute for Strategic Reflection (MISTRA) published its book entitled South Africa and the Global Hydrogen Economy: The Strategic Role of Platinum Group Metals. The publication explored the strategic opportunities that arise from South Africa’s endowment of these strategic minerals. It considered opportunities available for the country, the region and the world to better leverage this endowment for growth and development, in a manner that is environmentally sustainable. At a workshop with policy-makers, producers and other industry stakeholders, soon after the launch of the book on Platinum Group Metals (PGMs), the need to broaden how beneficiation strategies are envisioned was underlined. Participants strongly argued for research into financial beneficiation, given the massive concentration of these endowments in southern and South Africa. This is precisely what this research report seeks to interrogate. In partnership with Pan-African Investment and Research Services and the Johannesburg Stock Exchange (JSE) Limited, MISTRA set out to investigate the desirability and practicability of setting up a PGM exchange in South Africa. Besides the principled matter of financial beneficiation, fundamental and practical questions that needed to ix a south african pgm exchange be addressed included global security of supply, transparency and efficiency of mechanisms of trade, and the possibility of smoothing out extreme price volatility. This would guarantee the supply of PGMs on time, in line with production costs and at a reasonable price. Conventional wisdom has it that commodity-exporting coun- tries have only marginal prospects of taking optimal advantage of their endowments through multidirectional economic linkages. According to this logic, resource-led development is usually accom- panied by a ‘resource curse’ and ‘Dutch disease’. However, the globe is littered with examples of mineral-rich countries that have utilised economic linkages for developmental purposes, proceeding from the premise that a ‘resource curse’ is not the natural order of things. It is but a function of social agency. The fundamental issue is how to make linkages work! The authors of this research report argue that there is maximum possible value to be derived from using financial linkages to advance development. They examine the policy context, in terms of crucial legis lation and other statutes, within which such an exchange would be possible. They also interrogate the practicalities of setting up such an exchange, including spot and futures contracts to be handled, quantification of trade, and a variety of logistical matters that attach to the exchange’s operations. The research process also entailed wide-ranging and rigorous engagement with stakeholders in both the public and private sectors. These included regular interactions through multiple platforms such as workshops, briefing sessions and colloquiums, with representatives from government, academia, labour, business and regulators. While inspired by the desire to make financial linkages work in the South African context, this research report does not, by any means, assume that success is guaranteed. Besides debating the desirability and practicability of such an undertaking, the authors are all too well aware that many practical hurdles will have to be jumped over before a PGM exchange becomes a reality. It is the hope of the project team that this report will catalyse x preface debates and actions that will contribute to a scenario in which South Africa turns a page in its beneficiation endeavours. MISTRA wishes to express its profound appreciation to the researchers, the institutional partners and the participants in the various project events for their invaluable inputs. The Department of Science and Innovation fully appreciated the importance of this undertaking and embraced what is indeed a venture into uncharted waters, and we wish to thank them for their support. Joel Netshitenzhe Executive Director MISTRA xi Acknowledgements The Mapungubwe Institute for Strategic Reflection (MISTRA) would like to express its sincere gratitude to several organisations and individuals. These include our research partners, Pan-African Investment and Research Services and the Johannesburg Stock Exchange Limited. MISTRA was fortunate to have Dr Iraj Abedian of Pan-African Investment and Research Services to lead the research team, and Xolelwa Kashe-Katiya, Director Project Management at MISTRA, to drive and oversee the project from its genesis to completion. Thanks also go to researchers, past and present, in the Knowledge Economy and Scientific Advancement Faculty at MISTRA in which the project was housed: Zamanzima Mazibuko, for her sound advice; Duduetsang Mokoele, for the important role she played as project coordinator; former faculty head Dr Velaphi Msimang; and former project coordinator Wilson Manganyi. Many other MISTRA staff contributed to the successful outcome of this project. They include Lorraine Pillay, who oversaw the finan- cial management of the project; Terry Shakinovsky, who ensured that the highest publication standards were met; and Anelile Gibixego, Dzunisani Mathonsi, Towela Ng’ambi, Lerato Mahlangu, Rose Ngwato and the events task team led by Siphokazi Sigenu, who provided logistical support. xiii a south african pgm exchange The project was privileged to have a committed research team, drawn from within and outside of MISTRA: Trudi Hartzenberg, John Stuart, Neale Baartjes, Khensane Hlongwane, Themba Moleketi, Njabulo Zwane, Duduetsang Mokoele and Lyndall Mujakachi. Thanks also to Professor Alan Hirsch and Joel Netshitenzhe for their thorough reading and review of the manuscript; Tracey Hawthorne for copy-editing; and Triple M Design for the design of the report and cover. Deepest gratitude to the Department of Science and Innovation (formerly the Department of Science and Technology), without whose generous donation the report would not be a reality. Lastly, thank you to the consultative forum that fiercely challenged the research team at each turn. xiv Abbreviations AfCFTA African Continental Free Trade Agreement AMCU Association of Mineworkers and Construction Union Amplats Anglo American Platinum ANC African National Congress AsgiSA Accelerated and Shared Growth Initiative for South Africa ASM artisanal or small-scale mining (BB)BEE (broad-based) black economic empowerment BRICS Brazil, Russia, India, China, South Africa CBOT Chicago Board of Trade CGE Computable General Equilibrium CME Chicago Mercantile Exchange DIRCO Department of International Relations and Cooperation DLT digital ledger technology/ies DMR Department of Mineral Resources ECX Ethiopian Commodity Exchange ESAP Economic Structural Adjustment Program ETFs exchange-traded funds FEDUSA Federation of Unions of South Africa fintech financial technology FRIDGE Fund for Research into Industrial Development, Growth and Equity xv a south african pgm exchange GDP gross domestic product GEAR Growth, Employment and Redistribution GEPF Government Employees Pension Fund GNP gross national product ICT information and communications technology IT information technology ITC International Trade Centre JSE