Plat­inum mar­ket on the rack

Planned ETF threat­en­ing to stretch sup­ply fur­ther

Finweek English Edition - - Companies & markets - AL­LAN SEC­COMBE & DAVID MCKAY

SWISS BANKERS don’t do emo­tion. And Stephan Mueller, prod­uct man­ager at the state-run Zurich Can­tonal Bank (ZKB), con­firms that stereo­type. He last week put the world’s plat­inum in­dus­try in a spin af­ter un­veil­ing plans to launch a metal-backed ex­change traded fund (ETF).

The world’s awash with ETFs which, ap­plied to the min­ing in­dus­try, are shares rep­re­sent­ing met­als pro­vid­ing the in­vestor

It’s go­ing to re­sult in a more volatile metal price.

with an al­ter­na­tive to in­vest­ing in com­pany man­age­ment but avoid­ing the volatil­ity of di­rect metal in­vest­ment and much less of the cost. For ex­am­ple, the StreetTracks gold­backed ETF has notched up US$10bn in as­sets and is the fastest grow­ing ETF in his­tory and sev­enth largest in the US.

But in the rel­a­tively tiny plat­inum mar­ket, which is ex­pect­ing a small sur­plus this year – the first in a while – the R600m ($83m) in­vest­ment planned by ZKB is threat­en­ing to stretch sup­ply even fur­ther. And while that’s good news for short-term rev­enues, it’s also go­ing to re­sult in a more volatile metal price that, in turn, is a headache for pro­duc­ers.

Plat­inum pro­duc­ers like to plan around fu­ture metal prices, par­tic­u­larly long-lead min­ing projects in­volv­ing bil­lions of rand. The up/ down be­hav­iour of volatile mar­kets causes them real pain.

Con­se­quently, An­glo Plat­inum and Im­pala Plat­inum – the num­ber one and two pro­duc­ers by vol­ume – have stoutly de­clined to pro­vide metal to the bank, a de­vel­op­ment that Mueller says is “as­ton­ish­ing”.

“We don’t want to move the mar­ket and we don’t want to cut off metal flows to the mar­ket,” says Mueller. The metal, which is held in se­cure Swiss vaults, is read­ily avail­able to ETF hold­ers who want to take pos­ses­sion of phys­i­cal plat­inum, he says.

ZKB en­vis­ages an ETF ac­count­ing for 70 000oz of plat­inum and 200 000oz of pal- la­dium in the first year. ZKB has al­ready bought, paid for and stored that metal. The po­ten­tially dif­fi­cult part will be to source more metal if de­mand for the ETF takes off.

The bank will need to speak to other pro­duc­ers to se­cure metal sup­plies in the fu­ture. It could buy metal on the open mar­ket, but those quan­ti­ties are small, as most plat­inum pro­duc­tion is locked up in off-take agree­ments.

“For us it’s im­por­tant to have good con­tacts. But first it’s more im­por­tant to see how this ETF will de­velop,” says Mueller.

Judg­ing from in­ter­ested in­vestors jam­ming their tele­phone lines, says Mueller, the ETF could be­come a whole lot big­ger in the near fu­ture. Ex­pand­ing the plat­inum ETF is a sim­ple mat­ter of buy­ing more metal to back new cre­ations.

Though the amounts of plat­inum and pal­la­dium ZKB is talk­ing about are tiny in the larger scheme of the in­dus­try, there’s po­ten­tial for the amount of metal ab­sorbed by the fi­nan­cial in­stru­ment to be a whole lot larger, warns John Reade, of UBS In­vest­ment Re­search in Lon­don.

“We sus­pect that (ZKB’s fig­ures) is too con­ser­va­tive. We be­lieve hedge funds and private in­vestors will buy more than that and we lift our short-term price fore­casts for both

met­als,” Reade said in a note dated 17 April. The UBS fore­cast for plat­inum is now $75 higher at $1 325/oz in one month and $50 more at $1 350 in three months.

John Meyer, an an­a­lyst at Bri­tain’s Nu­mis Se­cu­ri­ties, says: “In the near term this ETF could well push plat­inum group metal prices sub­stan­tially higher.

But longer term, if it at­tracts sig­nif­i­cant funds it could dam­age the health of the in­dus­try and cause greater price volatil­ity, which is the last thing con­sumers want to see.”

There’s also the knock-on is­sue of how the ETF will af­fect the pric­ing of smaller plat­inum min­ers and ex­plor­ers in­ject­ing a fur­ther sense of un­re­al­ity.

The JSE has been lit up this year by stand out, al­most gar­ish, per­for­mances from Eland Plat­inum (up more than 300% over the past six months) and Wesizwe Plat­inum (up to R14,25 from just over R4/share in Novem­ber).

Part of the rea­son is that those min­ers will be able to ei­ther tap into early cash flow while metal prices are high or be­come takeover tar­gets as ma­jor min­ing com­pa­nies, such as Im­pala Plat­inum, seek to con­trol more sup­ply.

Lis­ton Mein­t­jes, chief in­vest­ment of­fi­cer at Metropoli­tan As­set Man­age­ment, says: “I cer­tainly won’t want to chase some­thing that’s up 150% over a year. I think it’s get­ting into ex­pen­sive ter­ri­tory.”

Get­ting into ex­pen­sive ter­ri­tory. Lis­ton Mein­t­jes

PLAT­INUM SUP­PLY AND DE­MAND 2002-2006

Source: John­son Matthey

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