PLATINUM GROUP METALS

Fear not fundamentals driving platinum's recent rise - analysts

Analysts maintain there is a fear premium attached to the current platinum price short term; longer term the industry has some difficult decisions to make.

Author: Geoff Candy
Posted: Tuesday , 21 Aug 2012

GRONINGEN (MINEWEB) - 

Platinum prices continued their upward move on Monday, hitting a high of $1,490.49 before falling back slightly as the day continued, and again this morning.

But, according to analysts spoken to by Mineweb, the upward move has a great deal more to do with fear than with fundamentals.

The reason for this is that most analysts still expect platinum to be in surplus in 2012 so, unless the strike at Lonmin's Marikana operations carries on for a significant amount of time or, it spreads rapidly to the rest of the South African producers, they maintain it is unlikely to change the makeup of the market in the short term.

As UBS's Edel Tully points out in a note on Monday, "UBS analysts' view is that the situation in South Africa is unlikely to be resolved swiftly, and will probably continue for the next six to eight weeks. Our colleagues also estimate lost platinum production of about 10koz over six days, which means that output losses could reach at least 70koz before an improvement in conditions is expected to emerge. This still would not clear out the 210koz expected surplus we estimate for the year."

She does add, however, that the current strength in platinum prices is reflective of growing concerns that Anglo American platinum might be next.

Another analyst spoken to by Mineweb, however, pointed to the fact that while Lonmin's share price is down almost 4% on the day, Amplats is up almost 1.5% and Impala is also in the green, although not by as much; moves they took to indicate that many in the market are still fairly positive that this is going to end up a Lonmin-specific issue.

Speaking to Mineweb's Metals Weekly Podcast in May, Johnson Matthey's Jonathan Butler explained that the group was anticipating that the platinum market would remain in a surplus in 2012 and at a similar level to that which we saw last year which was 430 000 ounces."

The reasons for this assumption were a fairly stable level of demand from the auto market and a softening in other areas of demand like the glass and petrochemical industries that would be matched by the fall in supplies - for example  the 6 week strike at Impala Platinum, which saw a loss of more than 100,000 ounces alone.

Thomson Reuters GMFS's Paul Walker went even further around the same time, explaining that a structural surplus in the platinum market is becoming "hardwired" into the system.

Since then, we have also seen a lowered production target from Amplats, the Marikana losses and the shutdowns at Aquarius.

The CPM Group, though, in the 2012 edition of its PGM Yearbook, writes: "In 2012 supply is forecast to fall as virtually no new PGM production capacity is added to annual supply and labour strikes earlier this year halted production for extended periods."

And here we come to the crux of the longer term problem.

Over the short term, the fact that there remains an overhang of the metal has helped to keep prices low, especially when it is coupled with weaker-than-expected demand in regions like Europe where the sovereign debt crisis has kept traders in the metal fairly despondent.

Even if demand were to pick up more than many are expecting especially in other areas of fabrication, like jewellery where, ironically, lower prices would likely be a good thing - something the CPM group expects - because of the predominance of poor headlines out of Europe, the perception remains (at least in the short term) that demand is weak which isn't good for prices.

As Natixis, writing in its third quarter commodity review, points out " The current price of platinum is unsustainable. While producers may be able to sustain output at most of their existing mines, it is hard to see any exploration or investment in new mines taking place until platinum prices push up well above $1,600/ oz."

It adds, that wage and energy inflation are already forcing extraction costs toward the upper reaches of the $1,400/ oz level which will see further shutdowns than have already been seen if prices continue to languish.

Thus, while the recent bump in prices is likely to be welcomed, another irony not lost on the market, they are still not nearly high enough for many of the country's operations to produce profitably.

They are also certainly not high enough for the miners to really start contemplating bringing new production on stream. And, while more production is the last thing the sector needs, the problem is that, for many of these mines, shutting production only adds to the cost base, making it increasingly difficult to return to profitability at a later date.