Supply shortfall may see platinum prices spike

Report says new capacity of vital metal is insufficient

PLATINUM is a vital metal for many industries yet future supplies may be in jeopardy with the slowdown in mining investment.

Andries Rossouw, partner at PWC, says the firm recently issued its Platinum Report that highlighted issues the industry is facing, in particular the lack of investment and the impact this will have on future supplies.

“The production in the platinum sector will remain flat until about 2021, at which point it will start to fall as shafts reach the end of their lives and begin to close.

“This will result in a significant drop-off in supply. There is some new capacity coming to the market but it is insufficient to make up the shortfall,” Rossouw says.

The expected peak of platinum production in 2021 is below present world demand for the metal. This is taking into account all other present sources of supply, including recycling. In other words, in this economic environment, before any uptick in world economic activity, there is insufficient platinum supply.

This apparently strange situation — where demand exceeds supply and insufficient new supply is being brought on stream — is because platinum prices are relatively low and thus investment in new projects is not forthcoming.

“Prices have kept low despite the shortfall in supply ($1,057.90/ounce at the time of writing). The reason for this apparent anomaly is blamed on above ground stockpiles that were estimated at 4-million ounces back in 2012 and believed to have reduced to 2.5-million ounces in 2014. The actual quantum of excess stock is a source of many a debate.

“This situation is likely a result of the events that took place in 2008 when SA experienced its electricity crisis and the world realised that there was an increased risk for supply from SA as the primary supplier of substance in the platinum market.

“Without electricity smelters cannot work and the supply of platinum dries up. World markets responded by pushing up prices through the roof. Subsequent stockpiling was justified during the extended industrial actions from 2012 to 2014 which did not have a similar price increase,” Rossouw says.

Another factor was that suppliers, who would normally have retained good stock levels, were forced to sell their platinum to maintain cash flows in the low price environment. “Therefore, while production falls short of demand, there is at present enough stock to meet demand,” Rossouw says.

He says while mining is a long-term business, with present low prices there is simply not enough cash available from investment to fund new projects.

Equity raised by the large mining companies for expansion has been used and the protracted industrial action from 2012 to 2014 left platinum companies with weaker balance sheets and they do not have the capacity to develop large-scale projects.

“There are enough good projects in SA that could be developed but the capital to invest in them is not available and there is no incentive to do so at current prices.”

Nor is improved pricing a short-term fix. Once economic activity increases and stockpiles reduce significantly and platinum prices rise, the timeline to get new projects into production is usually more than five years.

“A new deep level shaft can take as long as 12 years from the point at which the project is given the go-ahead before it begins to impact on production. There is a huge lag,” Rossouw says.

He says the 2008 to 2012 frenzy to bring new production online to serve China was mainly focused on bulk commodities such as iron ore, coal and copper.

“One of the reasons for prices of those commodities being low at the moment is the additional production capacity that has since come on stream.

“On the platinum side, although there was significant capital investment, it was of a sustaining nature and little added to supply. Since 2006 southern African platinum supply has declined.”

As stockpiles run down and supply continues to fall short of demand, there is a future scenario in which platinum prices could spike significantly.

“The big question is when will prices start to rise? Prices are probably going to stay at present levels for a year or two but eventually the market will realise what is happening and prices will go up. Initial price increases could be tapered with the supply of recycled jewellery and platinum kept as an investment to realise profits,” Rossouw says.

“However, eventually world markets will face the problem of the lag getting new production online. All the large platinum mining houses have been outspoken about the issue over the past few months and some are trying to ramp up their production in anticipation, but it is not in sufficient quantities to offset future expected demand.”