PGM prices have strong medium to long-term fundamentals, says RBC Capital Markets. But, for prices to move higher, either stronger economic indicators around the world or significant further labour disruptions in South Africa will be needed.
Writing in its latest Global Platinum Outlook note, out late last week, the RBCCM says the platinum market appears to be more balanced than the palladium market at the moment but, expects it to remain in a small deficit for the next several years.
“We forecast a deficit of 300koz and an average price of $1,600/oz in 2013 rising to $1,800/oz in 2014,” the bank writes, but adds that investment remains a key swing factor at the moment.
On the supply side, the bank points out that “South African platinum production declined from the peak of 4.6MMoz in 2010 to 4.1MMoz in 2012”. RBCCM expects this to rise slightly to 4.2MMoz in 2013.
But it adds, while the weak rand has helped cushion the blow of lower prices somewhat, “the current price is below the average all-in break-even cost implying a large number of mines operating at a loss.
“While union and political pressures and a flat cost curve have so far impeded meaningful production curtailments, we do not believe the current level of production is sustainable without higher metals prices.”
On the demand front, the bank expects to see relatively flat jewellery and autocatalyst demand.
“IHS Automotive expects continued weakness in the European car market forecasting production growth of (0.6) % and 4.7 % for 2013 and 2014, respectively,” it says.
Adding, “Currently cars in China use ~2g/t Palladium and tighter emissions standards could result in higher demand than our forecast. North American auto demand is also expected to grow albeit at a slower rate, from 15.4mm cars in 2012 to an estimated 17.7mm cars in 2017.”
Jewellery, which makes up around 35% of platinum demand is expected to remain roughly consistent with previous years, leading to expected demand of 2.6MMoz.
The other main drag on demand is the negative sentiment that remains clearly present within precious metals more broadly and gold in particular. As RBCCM says, “Platinum has a high correlation to gold prices and has likely been impacted by gold’s decline (Pt correlation is 0.87 vs. Pd at 0.6). We believe gold prices are a factor in investment demand which we view as the swing factor that could determine the 2013 market balance.”
As a result, of the outlook for platinum the bank remains fairly cautious of platinum equities, especially the South African ones which are exposed to further labour unrest.
Indeed, the bank writes, that on average PGM equities have slightly lagged the metals so far in 2013, “however, they have outperformed the Gold producers which are down 45% YTD.”
In terms of stock recommendations for the sector, RBCCM points to Platinum Group Metals, which it says, “continues to grow the Waterberg deposit with several upcoming catalysts; Stillwater Mining because it “offers leverage to palladium, steady production and a strong balance sheet”; and Sylvania Platinum as it is less exposed to labour issues than other producers because it is in the tailings processing game.