Platinum market on the rack
Planned ETF threatening to stretch supply further
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