PLATINUM WEEK-Rising output turns screw on S.African platinum sector

* Platinum prices down 35 pct over last five years

* 12 pct+ cut in S.African output needed to lift price

* Closing shafts, laying off workers a tough option

* Platinum cost curve: http://link.reuters.com/zan74w

By Jan Harvey and Zandi Shabalala

LONDON/JOHANNESBURG, May 18 (Reuters) - A perfect storm of rising costs, labour unrest and weak metal prices has pushed South Africa's platinum mining companies into radical restructuring, but they've held off unleashing what could be their most effective weapon - production cuts.

South African output of platinum group metals jumped in the early part of this year as mining companies continued to ramp up production following last year's record five-month strike.

While that's helping their businesses, it's also feeding into a 35 percent platinum price drop over the last five years, which has been only partly offset by rand weakness.

"If you are trying to identify catalyst that will raise prices, the standout, most obvious one is producers reducing output," GFMS' mining analyst William Tankard said.

"(Mining companies) are doing everything possible, even to the extent of jeopardising the longer term futures of these companies, to maintain current output in the face of low metal prices, when the true answer is, there's too much supply," another mining analyst, who declined to be named, added.

GFMS analysts at Thomson Reuters estimate that at least 500,000 ounces of South African production may need to be cut to lift prices, from just over 4 million ounces in a typical year.

Lonmin (LSE: LMI.L - news) became the latest miner to announce restructuring plans last week. The company plans to cut 3,500 jobs to reduce costs.

The world's largest platinum producer, Anglo American (LSE: AAL.L - news) Platinum, has already said it will sell assets and lay off workers, while number two Impala has announced an overhaul of its Rustenburg mines to boost productivity.

None of these companies, however, has said they will cut production.

Closing shafts is expensive, and making redundancies in a country with 25 percent unemployment is politically tough. Re-opening shuttered production is also lengthy and expensive, meaning that if prices do respond to closures, those producers who have cut will be worst positioned to benefit.

In the short term, cutting costs may seem like a better option. But inflation will limit the impact of that policy.

Members of the Association of Mineworkers' and Construction Union (AMCU) won pay hikes of around 20 percent annually after last year's strike.

"Given wage increases, if the mining companies manage to reduce head count by 10 percent, that probably gives a flat result on the year," Investec (LSE: INVP.L - news) analyst Marc Elliott said. "And what will they do next year?"

Analysts say the producers are banking on a rise in metals prices.

"We are specifically positioning the company for 2020," Northam Platinum Chief Executive Paul Dunne said. "(In) dollar prices there is a fundamental supply/demand deficit."

"We want to be positioned to be 'first to market' at that time, because building mines takes a number of years."

On the demand side of the market, buying by the car industry for autocatalysts is slowly picking up. But according to GFMS analysts at Thomson Reuters, without a significant cut in output, the market could return to a surplus next year.

GFMS forecasts that prices could re-test $1,000 an ounce this year. Last year's estimate for all-in mining costs for platinum was $1,209 per platinum equivalent ounce.

That leaves potential investors searching for incentives to buy into the industry.

"In theory it should be attractive, as it's the contrarian sector to be in. But once you go in and look at it in some detail, you begin to realise that the problems they face are still enormous," Barings fund manager Clive Burstow said.

"I think there will be better opportunities to enter the sector." (Editing by Veronica Brown and Susan Thomas)