PLATINUM GROUP METALS
Platinum's prospects to get better and better
Despite some unforeseen events continued supply side worries and strong growth in US auto demand mean that the prospects for platinum are looking good for 2011 and even better for 2012
Posted: Monday , 25 Apr 2011
Growing demand for diesel cars and trucks and a continued tight supply side, mean platinum's outlook is pretty good.
According to Leon Esterhuizen of RBC Capital Markets, while the "pressure cooker" situation that was anticipated at the beginning of the year as a result of a supply side squeeze has reduced somewhat recently because of unforeseen events such as the earthquake in Japan, there is still likely to be a shortage of the metal this year.
Speaking on Mineweb.com's Metals Weekly podcast, Esterhuzien added that while the impact of the Japanese crisis remains uncertain, it is interesting to note that, "Impala [Platinum] said recently that all of its Japanese clients continue to take metal even though they offered them the opportunity not to take metal right now."
"That sort of tells you that the people who are fundamentally involved in this market understand that there is probably going to be a shortage of metal - even if you're not using it right now, you better take it and you better start building stockpiles."
Part of the reason for this is the continued concern about the supply of PGMs from South Africa. Last week, Anglo Platinum, for example, announced production numbers almost 200,000 ounces less than they should have been doing on an average quarterly rate.
Esterhuizen says, while Anglo Platinum says it believes it can make up the shortfall, "if you look at things like the labour union activity that's currently building up - unions really starting to flex their muscles saying that this is the year they want another 15% raise - there is a real possibility for disruption there."
Over and above that, the country's continued power worries, mean, he says, "There is a very significant probability of disruption" and "even if we squeeze through this year by some or other magic, it's known that it's going to get a lot worse in 2012 and 2013 in terms of power supply."
On the automobile front, which has long been the main driver of PGM demand, Esterhuizen says that, while Chinese auto sales growth for March disappointed the market at only 6% when the expectation was for a number closer to 10%, currently, US growth, which is well in excess of 15%, is making up for it.
"Remember that the Americans all drive fairly large cars compared to the Chinese who drive fairly small cars. Growth in the US is actually far more positive for the market than what the Chinese growth number would be," he says.
He adds, " I believe the clever money is now starting to shift to platinum. You can see the high oil price in particular driving people to buy fuel efficient cars, and that is where diesel comes into the picture. It's interesting to note that the European car numbers were down roughly 5% for the quarter, but inside of that the diesel car market share actually grew by 2%"
He says, another good sign for the platinum market is the "phenomenal increase in production numbers for big trucks - the 16-wheelers - we're talking 40% growth rates in that market. That's very good for platinum and for diesel. Then in the US - people don't point to this, but even though the diesel market there is pretty small, it's growing at double digit rates."
All in all, Esterhuizen believes that while we are likely to see a positive market this year, "it's really building up into a better market next year, which is a good story for any investor - you don't want to be plugged in just for three or six months." Especially when one considers that the stocks themselves have been de-rated rather aggressively in the last two years.
"When you look at them relative to price cash flow multiples - price earnings - relative to the underlying metal price - all of those metrics have come down nicely so they're not looking as expensive as they used to - they're not continuously pricing in much further metal price rises.. the long and the short of it is I see valuations are low enough to get investors in this space - I see a positive outlook for the metal prices - that makes for a good investment scenario," he says.