Platinum price push via SA/Russian PGM talks? Don’t hold your breath

Were there a title for the world's foremost platinum analyst, Mitsui's Dr David Jollie would be a popular choice. Before joining the London office of the Japanese giant as its Precious Metals Strategic Analyst, Jollie spent a dozen years as the author of Johnson Matthey's Platinum Market Review, the industry's reference source. So there's none better anywhere to advise us about the price stimulating efficacy (or not) of a planned meeting between Government officials from South Africa and Russia. As you'll see in this CNBC Africa Power Lunch interview, the core problem is the countries have rather different interests. I also asked Jollie whether value investors who have been piling into SA platinum stocks are likely to reap some handsome rewards. Brilliant insights from the world's best. – AH

ALEC HOGG: Two BRICS countries, Russia and South Africa, hold approximately 80 percent of the world's Platinum Group Metals reserves. The two nations plan to meet to discuss ways of boosting the price of the metal. David Jollie is a Strategic Analyst at Mitsui & Co in London. David, the uninitiated think it's pretty easy – you get together, create yourself a little cartel, and push the price up. Is this wishful thinking?

DAVID JOLLIE: I think it's much more challenging than that.  I think it's a longer-term question as well, and perhaps less likely to happen than people think. Russia and South Africa clearly have a lot of interest in the same group of metals, but their interests are somewhat different. They have different metals being produced, different companies producing them, and different customers in many cases. So whether they actually share enough interests to want to move the same way in the market will be interesting to see. I think there are still things that you can do that would perhaps be price positive, but whether they will happen as a result of this and whether it will happen at a State level, is a much more dubious question.

ALEC HOGG: It is indeed. Russians are more heavily weighted towards palladium, whereas South Africa is more exposed to platinum?

DAVID JOLLIE: Yes. The Russians are a big producer of palladium and a much smaller producer of platinum. South Africa, the exposure is the other way around largely, although it's a big palladium producer as well. They have different interest at heart and certainly, if you look at historical pricing, palladium looks relatively expensive on a historical basis.

Platinum, compared to mining costs is relatively cheap.

Actually, what you might be looking to do in platinum to boost metal prices might be sensible. In palladium, it might be more about trying to support metal prices and that is quite a different issue. Doing that without upsetting customers and without damaging demand is much more challenging. Platinum consumers are much happier at today's prices because, let's face it, this is the lowest point we've been at in the last five years in Dollar terms and pretty low in Euro terms as well. Consumers are therefore maybe less worried about efforts to support the platinum price, particularly if that supports output as well.

ALEC HOGG: How much of a substitute are they for each other?

DAVID JOLLIE: It's a million-Dollar question. It's a very complicated one, but in the major application in the automotive sector where both metals are used in automotive catalysts, in the diesel sector platinum is pretty robust. It's used almost everywhere, and palladium is used some of the time and it adds some thermal tolerance and a few other things as well – a little bit of performance. In the gasoline sector, it's pretty simple to replace one with the other. Currently, many people use palladium with rhodium. A number of people use platinum, but it's a much smaller number. They could use platinum but of course, it's more expensive and they don't necessarily want to take the risk. If they're using platinum and palladium anyway, they may be happy with the mix of metals they're using so it's possible to change it, but it will take you time even then and it will cost you money. Of course, as a consumer your ideal is never to use any of it because you don't want to spend the money, but you use it because it's good. Both metals perform a very useful role.

ALEC HOGG: It's a very complex situation, as you've outlined it for us and perhaps we shouldn't be hanging our hats on the South African and Russian bureaucrats getting together and finding some way to push up the prices of both platinum and palladium. When you look at the price action – you did say earlier, that platinum was at its lowest level in some time – are you seeing any bright lights on the horizon?

DAVID JOLLIE: Well, you can certainly see consumer interest in buying platinum at that level, hedging it, and physically buying it. From a long-term perspective, most people would see platinum as being valuable at that level and a good investment, so you can see that. I think we've seen some efforts on the mining side to reduce production from the top of the cost curve and that's a positive as well, if you're looking for higher prices. There is economic recovery. The problem is that economic recovery is patchy on a global basis, rather unsteady, and a little bit slow as well. What we really need I think, if we're looking for higher prices is probably a weaker Dollar and a stronger Euro. What we probably also need is higher economic growth in Europe, in particular and maybe a rebound in China.

That's the sort of thing that might drive platinum demand higher, might drive investor confidence higher, and might give us a chance of recovering and getting platinum back up to levels of $1500 or so.

ALEC HOGG: David, I was at a conference last month where Chris Griffith from the biggest platinum producer in the word (Anglo Platinum) was saying that there's been a strategic shift by the platinum companies. No longer are they mining rock. They're actually mining platinum, which is – surprise, surprise – something they weren't doing in the past. Do you think the smarter way of approaching the mining operations is going to have an impact on the price, if not immediately, but in the medium to long-term?

DAVID JOLLIE: Yes, there's no doubt that the mining sector in general (and the platinum sector's included in that) has had a little bit more interest recently in return on assets and return on capital employed, and that suggested some mining simply isn't economically worthwhile. Not necessarily in this industry, but in general. A focus on saying 'what's economically useful' is a very positive thing. I think it's difficult in South Africa of course, because there are jobs involved. There are exports involved as well, so it's not a simple thing to just say 'we don't want to mine here' or 'we want to cut production'. Increased focus on saying 'this is a business and we have to be sustainable' is a positive for the industry over the long-term and probably as bullish for prices because one would imagine that we'd see some cuts in production of whatever scale as we focus more and more, on a mining level, of what's actually, economically viable to mine.

ALEC HOGG: Just to close off with, value investors here in South Africa have been taking big bets on platinum stocks. Would you support them?

DAVID JOLLIE: In the long-term, you can see value in platinum, in palladium potentially as well, and in rhodium too. The question about the individual stocks is much more complicated because I think we still have a little bit of lack of clarity about the results of the Mining Charter. We have some pressures from the EFF on the ANC. The ANC's policies – although relatively clear at the moment – might potentially change, so I think there's certainly potential there. Improved focus on profitability and return on capital is a strong positive. In an environment where I would personally expect to see stronger prices, I can see some value. However, South Africa, with a difficult labour relations environment and an interesting political environment isn't the easiest place for investors to understand.

ALEC HOGG: David Jollie is Strategic Analyst at Mitsui & Co Precious Metals. He was talking to us from London. We apologise for the slight delay between the questions and answers, but we would rather have that delay than not have David at all – fascinating insights.