Platinum fundamentals swing positive – price poised for rebound

(Bloomberg) — Shrinking platinum stockpiles, growing demand from carmakers and new uses being trotted out in the energy field are stoking producers’ expectations that prices are poised to rebound from a five-year low.

Production of the shiny metal, used for jewelry and in catalytic converters in cars, will fall short of consumption this year by about 500,000 ounces, according to a January estimate by Credit Suisse Group AG. Given that, industry leaders are debating how long it will take for buyers to use up reserves and start paying more for a less available product.

Platinum is “in its strongest position” in a decade, said Chris Griffith, chief executive officer of Anglo American Platinum Ltd., the industry’s largest producer. “The fundamentals are that demand is increasing.”

Griffith said he believes price will begin trending upwards relatively soon. Meanwhile, Terence Goodlace, CEO of Impala Platinum Holdings Ltd., the second-biggest producer, sees a little more distant change, estimating it will be two to 2 1/2 years for excess supplies to be depleted, with prices starting to recover in the second half of next year.

“The above-ground stocks for us is still a very, very big thing,” Goodlace told reporters at a media round table.

Platinum’s lustrous appearance and durability make it popular for jewelry, while its chemical properties make it well- suited for industrial applications. In southern Africa, source of more than 80 percent of mined platinum, the ore is typically produced with related metals such as palladium and rhodium, while in other regions it’s a byproduct of extracting other metals such as copper and nickel.

Higher prices can’t come soon enough for an industry that’s been struggling for about four years. Platinum’s price for immediate delivery fell to $1,161.88 an ounce on Feb. 24, the lowest since July 2009. It’s now cheaper than gold for the first time in 23 months.

Stockpile drop

Stockpiles, though, were down 39 percent to 2.5 million ounces at the end of last year from 4.1 million ounces in 2012, according to the the World Platinum Investment Council. These stockpiles are readily available to meet supply shortfalls from mining companies and recyclers and don’t include metal held in exchange traded funds, metal exchanges and industrial customers that can’t be easily bought.

At the same time, supply from many of the world’s biggest producers in South Africa has stalled as low prices combined with labor unrest on the continent to close mines.

During a five-month strike that ended in June, more than a million ounces of potential output was lost, according to research by Johnson Matthey Plc.

“On supply, you can say that production of platinum group metals is fairly constrained,” Andrew Lapping, who helps manage $39 billion at Allan Gray Ltd. in Cape Town, said in a Feb. 11 interview.

Demand Jump

As for demand, it exceeded 8.5 million ounces last year, a 7 percent jump from 2012. Johnson Matthey said.

Royal Bafokeng Platinum Ltd. said March 3 it expects demand this year to rise 4 percent, though the impact on mining companies may be offset by growth in recycling, which the company estimated at more than 8 percent. Recycling made up almost a third of total platinum supply last year, according to Johnson Matthey.

One of the main drivers for demand is the automotive market. Platinum and related metals such as palladium and rhodium are used in catalytic converters because they trigger chemical reactions that break down carbon monoxide and other gases into other compounds, reducing harmful tailpipe emissions by more than 90 percent.

Vehicle sales are expected to climb for a sixth straight year in 2015, increasing 2.4 percent to 88.6 million, market research company IHS Automotive said last month. Not only does that mean more catalytic converters, stricter emissions policies in some regions means more of the metal is being used in each one, Stephen Forrest, a metals analyst and chairman at SFA Oxford Ltd., said at a conference in Cape Town.

Automakers are also developing a new kind of electric car, powered by fuel cells. These systems use platinum as a catalyst in a chemical reaction that produces electricity from hydrogen. These trends mean more platinum is finding its way into more vehicles, Forrest said.

Closing Shafts

Closing or scaling down some shafts, along with the pull- back in capital spending will have a “dramatic effect” on future supply, R Michael Jones, CEO of Vancouver-based Platinum Group Metals Ltd., said in an interview. The company’s first operating asset in South Africa will begin production in the fourth quarter of this year.

Current prices don’t reflect the current state of the industry, Jones said.

“The spot platinum market is not tracking the real business,” he said. “We’re going to see the basic fundamentals being reflected in the market, but we’ve got a time right now where that’s not connected.”

Platinum producers expect growing confidence in the global economy, especially from consumers, to help trigger a pricing rebound.

‘Market Sentiment’

“I think right now price is less about market fundamentals and more about market sentiment, and I don’t know where market sentiment will turn,” Ben Magara, CEO of Lonmin Plc, the third- biggest producer, said in an interview. “Until you and I feel confident to buy another car then actually those fundamentals are not enough.”

Prices are likely to slide even more, to $1,100 an ounce by the end of June, before rebounding to $1,200 an ounce by the end of the year and $1,400 an ounce by the end of 2016, said Georgette Boele, an analyst at ABN Amro Bank NV in Amsterdam and the most accurate platinum forecaster in data compiled by Bloomberg.

Stockpiles aren’t the only reason for low prices, Boele said. Holders of platinum-backed investment products such as exchange traded funds are selling their stakes as they turn to the prospect of better returns from opportunities linked to a stronger dollar and expectations of higher interest rates, Boele said by phone.

“Platinum will move up again with the cycle when most of the speculative position are cut down,”she said. “The fundamentals are there for it to recover, but the investors first have to get out.” – BLOOMBERG