Platinum price downshift as mines get more power

The platinum price shifted down sharply ahead of the weekend on news that the South African mines would get more power to stave off job losses and reduce the impact on the SA economy.

LONDON - 

In yet another knee-jerk market reaction, the platinum price fell back sharply in what was put down to a mixture of profit taking, U.S. recession fears and then on news that the State-owned South African power utility, Eskom, would be upping power supplies to major mines from 90 percent of requirement to 95 percent. Pressure had been put on the utility to do this as the mines had been forecasting significant job losses due to the power supply shortfall, and the cut in output was also significantly affecting the South African economy in general.

Other precious metals fell back too, with gold retreating from its recent highs and palladium turning down in line with the platinum news. The news that Norilsk nickel would be leading a big market promotion for palladium into the jewellery sector seems to have had little or no effect on the market, or has just been overwhelmed with more negative data.

The Eskom promise was almost certainly the main driver in the case of platinum as the increase in power to be delivered will help trim production losses. But there will still be losses in output, disregarding any technical or safety problems which may yet arise which could add to them. Also the increased power supply has to come at the expense of reductions elsewhere, and one has to assume that new platinum project developments will have to wait in a queue as other sectors will take priority. Indeed South African press reports have suggested that supplies to new construction projects will be delayed by at least six months. Given that most analysts' forecasts on future platinum supply are still looking at output falls at older mining operations to be balanced, or exceeded, by supplies coming in from new mine developments any delays here will have supply impacts in the years ahead.

World platinum supply levels are in the region of 6.66 million ounces of which South Africa supplies around 5.22 million (78 percent). Demand is put at just short of 7 million ounces a year and rising between 2-3 percent a year. South African, and global, output is predicted to have fallen in 2007 and was expected to pick up in 2008, but now 2008 figures are being revised downwards despite the increase in power supplies to the mines. One could possibly anticipate a global deficit this year of around 400,000 ounces or more which will continue to keep pressure on the price. But this also assumes relatively normal production from the South African mines and any further disruption of any kind here could have a substantial impact.

The country with the second biggest reserves of platinum is Zimbabwe and production had been rising here, but the country's economic chaos and the avowed intent of the government to force the mining companies to divest 51 percent to local ownership is likely to completely stifle investment in the sector here, as well as impact on mine output. Zimbabwe also has power supply problems of its own!

Perhaps the rapid rise in the platinum price earlier this year - largely on the South African mine output fears - had been overdone too which suggests an equilibrium may be reached. Prices will remain high in line with supply falling short of demand. But, should any other disruptions appear in South Africa in particular, either affecting the industry in general, or one of the bigger mines, the price could be stimulated to move back upwards sharply again.

And, as for a final word on power: Eskom still has only around 5 days worth of coal stocks for its power stations. Serious disruption in the South African coal supply sector - either for technical reasons, or perhaps through the kind of weather which has already caused problems in that country, could bring back the power cuts nightmare. Coal prices too are climbing through the roof and for investors in the South African mining sector one also has to assume that the days of ultra-cheap Eskom power will be over soon which will impact the bottom line.

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