Curbing platinum output - too little, too late?
The outlook for the platinum group metal (PGM) market still looks decidedly cloudy, although there are some signs that SA production may be curtailed by next year – a belated response to poor demand and high inventories.
According to a report by the World Platinum Investment Council ( WIPC), a n organisation created to promote platinum usage and improve market transparency, capital tightness among producers could see output fall by some 600 000 ounces by 2016.
“Platinum production f rom SA declined by over 500 000oz/year, or 11%, from 2008 to 2013,” said Trevor Raymond, director of research at WPIC. “Over the same period annual capital investment declined by more than 40% to R17bn a year in the sector,” he said.
Capital investment in 2014 was R13bn and published capital investment for 2015 is R11bn. “Using the rate of capital expenditure alone as an indicator of likely future output, refined platinum output from SA will fall by an estimated 16% below the 2015 level in 2016,” he added.
There is some agreement that output cuts are finally beginning to take shape.
“Producers have begun to cut production, cost and capex and to defer projects,” said Christopher Nicholson, analyst at RMB Morgan Stanley. “We estimate about 300 000 to 700 000 platinum ounces are at risk over the next 12 to 24 months,” he added. SA’s production base is about 4.2m platinum ounces.
An example was the recent decision of Royal Bafokeng Platinum (RBPlat) to delay capital spending on its Styldrift project which was to add 300 000 ounces to its output – a doubling – until the market had revived. It is one of the first platinum companies to suggest that the current slump in the PGM market may extend well beyond 2015. Said Andrew Byrne, an analyst for Barclays Capital: “While these (RBPlat) announcements have limited impact on platinum production expectations for 2015-2017, it does mean that the medium-term supply-demand dynamics of platinum are tightening, with these decisions likely to see about 400 000 ounces (5% of global supply) of production removed from forecasts.”
What’s interesting, however, is that while demand may be tapering over the next two years, the balancing side of the equation – the health of platinum supply - remains equally, if not more, difficult to predict.
Commenting on s upply c ut s , Nicholson said that they may not be enough to tighten the market in the medium term. There is uncertainty about the extent and duration of the downturn in auto and jewellery demand for platinum in the European market, while there is also the danger of “broader secular concerns” (not cyclical but permanent) in European diesel demand for autocatalysts, especially as there’s a move towards sourcing alternative technology.
Added to this is the question of the amount of above ground stocks of platinum, thought at the last count to total about 2.6m ounces. Steve Phiri, CEO of RBPlat, commented at his firm’s recent interim results presentation that stocks were “ticking up again.”
It should be no great surprise that the remainder of 2015 and 2016 should prove one opacity after another for the PGM market; after all, this has been the case for the previous three years with major supply and demand shocks in each of 2012, 2013 and 2014 making it difficult for producers to call the market – an insight intriguingly observed by Barclays’ analyst Byrne.
The Marikana disaster in 2012 and associated strike curtailed some 500 000 ounces in platinum supply, which was followed in 2013 by a surprise demand for some 1m ounces of platinum as exchange trade funds took hold. There was also the build-up of 600 000 ounces in inventories that helped platinum consumers sit out the 2014 strike in which some 1.4m ounces of supply was held back.
For some, SA’s platinum industry restructuring just can’t come quickly enough, or may never come owing to government hostility to supply cuts and inevitable job losses.
Said Investec Securities in a recent note: “Given the current labour situation in SA we cannot see the industry being able to restructure, cut production and save itself. This is like watching a crash in slow motion with nothing that can be done to stop it.”
CEO of RBPlat