Tight supply may keep shine on platinum

Prices on brink of a ‘bear market’, but there is reason for optimism, writes

THE first drop in platinum mine supply in four years and record car sales, the biggest source of demand, are reducing a surplus of the metal and shoring up prices on the brink of a bear market.

Output will drop 4% to 6,14million ounces this year as labour strikes and safety concerns disrupt mining in SA, the biggest producer, Barclays estimates. That will diminish the annual glut by 90% to 37 000oz, the bank predicts. Prices will average $1 750/oz in the fourth quarter, 22% more than now, the median of 13 analyst estimates compiled by Bloomberg shows.

The metal’s price, used to make vehicle catalysts and jewellery, has slid 16% in the past three months. Hedge funds are now their least bullish since at least 2009 on speculation that slower global economic growth will curb demand. Prices are now within about one percentage point of average production costs, which rise as companies dig as deep as 2km to find ore and face surging wage and energy bills.

“Platinum is very, very cheap at the moment,” said Thorsten Proettel, an analyst at Landesbank Baden-wuerttemberg in Stuttgart, Germany and the third-most accurate forecaster of platinum prices in Bloomberg Rankings in the two years to end-december. “It’s more the supply side which could help the platinum price accelerate because supply is very tight.”

The metal’s 17% plunge to $1 436,50/oz since late February leaves it within three percentage points of the common definition of a bear market. The slump pared this year’s gain to 2,5%, still beating gold, silver and palladium. The Standard & Poor’s GSCI spot index of 24 commodities fell 3,3% since January 1 and the MSCI All-country World index of equities rose 0,8%. Treasuries returned 1,2%, a Bank of America index shows.

It costs an average $1 437 to extract an ounce of platinum, says Mr Proettel. The slide in prices is eroding earnings, discouraging the development of new mines or expansions. Impala Platinum, the second-biggest producer, will report a 21% drop in net income in 2012 while London-based Lonmin, the third-largest, will make 76% less profit in its fiscal year ending in September, analyst estimates compiled by Bloomberg show.

Hedge funds and other large speculators cut wagers on a rally by 70% to 6 200 US futures and options in the three months to May 22, according to Commodity Futures Trading Commission data. Holdings in exchange-traded products backed by the metal dropped 11% to 41,1 tons valued at $1, 9bn since September, data compiled by Bloomberg show.

Rebounding prices may encourage more recycling, compensating for the decline in mine output. Scrap supply from vehicle catalysts, electrical goods and jewellery reached a record 2,05-million ounces last year, from 565 000oz in 2002, according to Johnson Matthey, the maker of one in three of all catalysts. Prices averaged a record high of $1 721/oz last year, compared with $541/oz in 2002.

The surge is encouraging car makers to use more palladium in catalysts, canisters with honeycomb-like surfaces that convert emissions into less harmful substances. Platinum’s sister metal is trading at $603,50/oz and accounted for about 30% of the metal loaded into catalytic converters for diesel-power vehicles last year, up from 20% in 2009, Johnson Matthey estimates.

Demand for platinum, which Barclays expects will grow 1% to 7,99-million ounces this year, may fall short of expectations as economic growth weakens. China, the world’s largest car market, expanded 8,1% in the first quarter, the slowest pace in almost three years. About $4,2-trillion was erased from the value of global equities since last month on concern that Greece will exit the 17-nation euro zone.

Global sales of cars and light commercial vehicles are poised to rise 5,5% to a record 79,4-million units this year, says LMC Automotive, a research company in Oxford, England. Car makers account for 38% of platinum consumption, Johnson Matthey estimates.

Prices may also rebound as supply becomes more constricted. Mining companies are contending with strikes by workers demanding higher wages. Workers at Impala’s Rustenburg mine, the world’s biggest, started a month-long strike over a pay dispute in January that cut more than 120 000oz of output. The company said last Thursday that the latest labour unrest at the site cost 6 000oz.

Work has also been suspended after 123 mining deaths and 2 918 injuries in SA last year, Mineral Resources Minister Susan Shabangu told reporters on March 20. The platinum industry lost about 300 000oz of production last year because of safety stoppages, London-based Anglo American said on February 17.

Mine disruptions in the first quarter drove platinum prices 17% higher, the best performance in three years. While most of that was erased in the subsequent slump, the metal’s gain since the start of January compares with a 2,3% advance in silver, 0,8% increase in gold and a 7,9% drop in palladium.

Lonmin extracted 4,4g of platinum-group metals from every ton of ore last year, 5,4% less than in 2010, according to its annual report. Production costs rose 11% because of wages, energy prices, safety stoppages and strikes.

The company will report net income of $66,4m in the 12 months to September 30, compared with $273m a year earlier, the mean of nine estimates shows. Impala will make R5, 25bn, compared with R6, 64bn last year, according to the mean of seven estimates.

That contrasts with Anglo American Platinum, the biggest producer, which is expected to post earnings of R4,35bn this year, from R3,59bn in 2010, the mean of six estimates shows. Shares fell 10% this year, compared with a 17% drop for Impala and 24% for Lonmin.

Shafts are now as deep as 2 115m and temperatures at the rock face of Northam Platinum’s Zondereinde mine can reach as high as 72°C. It uses as many as seven refrigeration units to pump chilled air into the mine, according to data on the company’s website.

Many producers believe the price is too low to sustain the industry, says Bart Melek, the head of commodity strategy at TD Securities in Toronto. “Given the fact that we’re going to see some decent demand growth over the next several years, we’re going to have to see expansion.” Bloomberg