Why are platinum and palladium not meeting analyst expectations?

The impact of the 10-week old strike which has halted production at a number of South Africa’s platinum mines so far seems to have had little impact on PGM prices. Why?

While every now and again some analyst or other comments that perhaps palladium is outperforming gold, or platinum is, on the year to date both the pgms have moved up pretty well pari passu with gold overall.  All three metals are around 7-8% up since the beginning of the year.  Indeed gold moved up substantially further during the height of the Ukraine crisis and while the pgms followed they did not quite do so to the same extent.  As gold has fallen back though, the pgms have caught up again.

Many analysts have been preaching the investment merits of the pgms in the light of the long running platinum strike in South Africa which has seen a number of mines effectively shut down so far for some ten weeks – with no end in sight to the strikes yet.  The more aggressive AMCU which has become the dominant player among the platinum mine unions, has been demanding an effective doubling of the workers’ wages which the mining companies have concertedly said they cannot afford – and with many of the deep narrow reef platinum producers finding it tough to make any kind of profit even at current platinum prices they do have a point.  But AMCU does not seem to be giving ground, but one suspects it cannot hold out much longer given the major problems pay-packetless workers are experiencing.  They are probably only remaining out on strike through intimidation (in the South African labour scene to break ranks in this respect could mean severe beatings or even death). 

See: Fear of deadly reprisal, hunger, in Rustenburg as SA platinum strike marches on

With South Africa producing around 70% of the world’s platinum and perhaps 35-40% of palladium analysts had assumed the South African strikes would decimate global mine supply.  However not all the South African mines are on strike, but perhaps even more importantly some have huge stockpiles and continuing supplies from these are virtually completely negating many analysts’ dire projections.  Chris Griffith, CEO of the world’s largest platinum producer, Anglo Platinum (Amplats) and second largest palladium producer (after Russia’s Norilsk), recently went on record as saying that the company is still operating at about 60% of capacity, despite the strikes, and that it also still has  around 215,000 ounces of platinum in its stockpiles.  This is around half the amount it had when the strikes started back in January so the implication is that Amplats, South Africa’s largest producer, could probably go on supplying the market fully for perhaps another two months or more.

See: Amplats still has half its platinum stockpiles in strike’s 10th week

So while the supposedly improving global economy should see an increase in world platinum and palladium demand, it seems that supplies may well be largely unaffected so far despite the impact of the South African strikes.  This would mean prices are not yet being driven by specific new supply shortages, although longer term the strike impact could lead to mine shaft closures as some mines are deemed uneconomic.  Longer term the industry may have the opportunity to recover from these with the opening up of new wide reef horizons currently being worked by Amplats to the north of the Bushveld Igneous complex and being exposed by potential new producers like Ivanhoe and Platinum Group Metals.

The main problem with the existing deep underground platinum mines in and around South Africa’s Rustenburg area is that they are extremely difficult to mechanise without seeing excessive dilution as the platinum group metals containing horizons are extremely narrow (a matter of a few centimetres).  They are thus hugely labour intensive to work and even the 9% pay increase being proposed by the mining companies would likely lead to some closures unless there is a very sharp increase in platinum and palladium prices.

The new Flatreef and Waterberg deposits to the north, which appear to likely be highly suited to large scale mechanised mining are still in the early exploration phases and are unlikely to see production until much before the end of the decade – at which point they could prove to be a major game-changer for the South African platinum mining industry.  But meanwhile it is likely to struggle on, once the strikes are over, but perhaps at reduced production levels if closures are implemented which could see shortages develop in the medium to long term – but perhaps not yet.

iPad Version: Picture – Platinum grain formed during refining at Anglo Platinum’s precious metals refinery, South Africa: VisMedia +44 (0)20 7613 2555

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