Platinum – where to next?
The global platinum market is undergoing structural shifts that have left South Africa’s platinum industry smaller than it was a decade ago.
After a damaging five-month strike that will result in employees taking over a decade to recoup losses on the most optimistic assumptions, Amcu has agreed increases for entry level of 11 to 12 per cent per annum CAGR over three years. The key outcome from the current impasse will be whether the producers use this opportunity to shut down high cost and marginal operations. If a material amount of production were to be taken offline, producers could return to cash generative levels as the platinum spot market tightens. However, history and recent commentary suggests unwillingness for corporates to do so, largely due to concerns of a political backlash and potential opportunity costs as Dollar metal prices rebound. Laurium Capital therefore remains negative on the equities but positive on the individual platinum-group metals (PGM) which we hold across the Laurium funds.
Supply issues persist
Sources of supply are essentially from mining operations (primary supply), above-ground inventories (which includes metal in the hands of investors) and recycling (secondary supply). In 2004, primary production from South Africa provided more than two-thirds of the world’s total supply of the metal. In 2013, the country’s share had fallen to fractionally more than half of the total, with secondary supply from autocatalysts and jewellery scrap contributing more than a quarter of global supply.
Despite this decline in global primary production, platinum and palladium prices continue to reflect the ready availability of metal on the spot market, causing a notable recent disconnect between the on-paper PGM fundamentals and observable USD PGM prices.
According to the producers, the consequential output lost from the strikes that were declared on 13 January 2014 has been just less than 10koz of platinum per day. The total loss approximates 13 per cent of annual global supply and equates to revenue losses of circa-R24 billion. Given the producers’ ongoing reliance on labour, a move away from conventional mining methods towards mechanisation has been touted by many of the affected producers.However, aside from the intractable complexity around restructuring a massive operational footprint and associated workforce, the geology and established mine infrastructure for most of the Western Bushveld platinum mines are just not conducive or amenable to wholesale mechanisation.
Autocatalyst, exchange traded products and jewellery demand on the rebound
Laurium Capital expects fabrication demand for the PGMs to accelerate in 2014 on the back of rising and synchronous global economic growth and the ongoing implementation of stricter and more widespread vehicle exhaust emission standards. Of particular importance to platinum demand is the outlook for auto production (and sales) in Europe and the UK, where diesel-powered vehicles enjoy a +50 per cent market share (diesel cars have platinum-based exhaust catalysts).
After five years of relatively weak global auto statistics from these regions, Laurium’s view is that there must be pent-up demand that is likely to become satisfied as employment and disposable income levels begin to recover.
Despite the bullishness of our macro expectations, coupled with the primary supply distortion caused by ongoing strike activity in South Africa, it begs the question why the USD platinum price continues to languish. The USD platinum price did rally in the days before the strike was announced but it has since fallen from $1 457 an ounce on the day the strike began to $1 435 an ounce, which is 1.5 per cent lower. If mined supply is down, and demand seems at worst flat, the only logical inference to be drawn is that very high spot market stock volumes have filled the void between supply and demand.
Platinum inventory levels are likely to be relatively high throughout the global PGM value chain, partly because demand has been noticeably weak from the financial crisis, coupled with the well-telegraphed nature of the ongoing strike in South Africa, which gave the major producers significant time to stock up to meet contractual deliveries.
However, how long can current demand be satisfied from existing stockpiles? Consider that all the gold ever produced would fill approximately three Olympic-sized swimming pools. When compared to all the platinum ever produced, this would only cover your ankles in one Olympic-sized swimming pool.
At Laurium Capital, we therefore expect to see US$ PGM prices rising steadily in 2014/2015 as growing demand and constrained primary production tightens markets even in the face of rising scrap supplies, and it might just be a matter of time before the above ground stockpiles are depleted.