Materials Risk

I have had a large number of new subscribers join over the past few months. Thanks for sticking with me! In case you hadn’t seen some of the content that Materials Risk has put out there I’ve pulled together the 7 most popular articles / resources of 2018 so far.

1. Sugar prices: The top 10 most important drivers

2. Copper prices: The top 10 most important drivers

3. A long term view creates opportunities for commodity investors: Interview with Mike Alkin

4. Probably the best podcasts on macroeconomics, markets and geopolitics

5. Seasonal price charts

6. Positioning analysis in commodity markets: An interview with Mark Keenan

7. A growth business: Potash market shows signs of life

1) South Africa

As of 2016, South Africa produces approximately 70% of the world’s newly mined platinum. As a result, conditions in South Africa are crucial to the supply of platinum. Given that South Africa’s political environment has become increasingly volatile in recent years, platinum supply is subject to a fairly high degree of political risk. Platinum production from their mines have been hit by labour disputes and foreign currency instability. These risks were felt particularly hard in 2014, when workers for for a number of miners all went on strike hitting 40% of global platinum production. Geological problems have also hit the nations miners with flooding causing the shutdown of mines in the past. Meanwhile the country’s crumbling electricity infrastructure has also caused production to be delayed as intermittent or longer electricity cuts delay platinum production.

The other main producers of mined platinum are Zimbabwe, North America and Russia. Taken together with output from South Africa mined supply accounts for around 75% of total platinum supply.

2) Recycling

Around one quarter of total supply comes from recycling and recovering of platinum from vehicles and jewellery. Higher prices typically incentivise the recycling of platinum catalytic converters from vehicles. But since platinum forms a very small proportion of the value of a vehicle high platinum prices only have a marginal impact on the incentive to recycle. High steel prices encourage dismantlers to recycle vehicles and take platinum and other materials as byproducts.

3) Stockpiles

Very little information is known about how much platinum is held in stock (either for investment purposes or for industrial applications) since not all of the metal is accessible and could be stored in vaults. Current estimates of above stocks by the World Platinum Investment Council (WPIC) put stocks at about 20%-25% of annual demand, however estimates vary widely with many suggesting stocks could be significantly larger. Perhaps even more important however is who holds the platinum and under what circumstances they would be prepared to make them available to the market.

4) Vehicle demand

Roughly 40% of platinum demand is from the automotive sector and so changes in vehicle production have a significant impact on platinum fundamentals. Platinum is typically used in catalytic converters fitted to diesel cars while petrol powered cars generally use palladium. With diesel cars typically using platinum in its catalytic converter trends in Europe (where diesel cars form a much higher percentage of the vehicle mix than other regions) are worth keeping an eye on.

5) Emission standards

Diesel cars have become increasingly unpopular in Europe since the Volkswagen scandal rocked the car industry over the under-reporting of emissions and the driving public has become more aware of the environmental problems that diesel cars can cause. Public uncertainty over the risk and timing of possible diesel bans in some cities has also put a dent in sales of diesel cars in Europe. Its not all bad news – the growth in the use of catalytic converters on heavy duty trucks in the USA and Asia (which tend to use diesel) as controlling emissions becomes more important is contributing to higher demand for platinum.

6) Technological change

Should electric vehicles grow in popularity then demand for both platinum and palladium could fall. However, the continued use of hybrid vehicles may mean the impact is not as severe. Until recently it was thought that fuel cell cars would use a lot of platinum, potentially providing a new source of demand for the metal as existing internal combustion engine cars decline. However, it is now thought that the amount of platinum used could be cut to very low levels. Should the price of platinum decline relative to other substitute materials other uses will be found by manufacturers, but as always it is very difficult to envisage what these could be nor the amount of material that they will use.

7) Jewellery

Demand for platinum jewellery was almost nonexistent 20 years ago. However, in recent times, platinum’s use in jewellery has grown extremely fast. Jewellery demand for platinum accounts for approximately 30% of total platinum demand.

8) Industrial applications

Platinum is also used in applications as diverse as laboratory equipment, dentistry equipment and computer hard disks.

High prices incentivise vehicle manufacturers to look for alternatives or reduce the amount of metal used in their products, whether catalytic converters or other products. This could involve substituting platinum with other metals such as palladium or rhodium.

9) Investment

The launch of a number of two platinum exchange traded funds in 2017 helped support investor demand, opening up the possibility of investing in platinum to a wider group of investors while diverting platinum which may have otherwise been available to industrial customers.

Investors should be cautious though. Unlike gold and to a lesser extent silver, the platinum market is a lot more opaque while swings in investment fund flows can have a disproportionate affect on prices.

Silver has been compared to gold as being ‘gold on steroids’, acknowledging its volatility. Platinum, palladium and the other precious metals are in the same camp of volatile returns, if not more so.

10) US dollar

A weaker dollar can act as a disincentive to producers to increase output. For example, a depreciation of the US dollar against the South African rand will (all other things being equal) reduce profit margins for platinum miners based in the country. All of its revenue will be received in US dollars, which will now buy less rand, but some proportion of the costs will be denominated in rand and will remain constant (at least in the short term). The prospect of a lower profit margin acts as an incentive to decrease the supply of platinum on to the global market.

Previous episodes

Gold prices: The top 10 most important drivers

Silver prices: The top 10 most important drivers

Natural gas prices: The top 10 most important drivers

Copper prices: The top 10 most important drivers

Livestock prices: The top 10 most important drivers

Sugar prices: The top 10 most important drivers

Wheat futures spiked by almost 5% yesterday after comments from the Ukrainian deputy agriculture minister on Facebook of “export limits for wheat” were misinterpreted as an imminent export ban.

Countries such as Russia and Ukraine introduced export bans on agricultural commodities during the period 2008–12, a decision designed to protect domestic consumers from higher food prices. However, these export restrictions may have exacerbated concerns about global agricultural supplies and in turn contributed to higher global food prices.

However, the Ukrainian agriculture ministry typically agrees an annual export quota with the grain trade, giving guideline figures on the volumes that are permitted to be exported each marketing year. In fact this will be the seventh year that Ukraine has set a non-binding quota on wheat exports.

Restrictions on agricultural commodity exports are legal under global commerce rules, even for those countries (such as Ukraine) that are bound by their membership to the World Trade Organisation (WTO). The General Agreement on Tariffs and Trade, the core treaty of the WTO, has banned “prohibitions or restrictions” on exports of commodities since 1947. However, it permits them when “temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential” to the exporting country. The treaty also fails to explain what it means by “temporarily” or what a “critical shortage” is, leaving countries ample room for manoeuvre.

Yesterday’s event shows how much the wheat market is on edge over higher prices and the risk of shortages. As I explained in a previous post with global grain demand so strong, agricultural markets have come to rely on near-perfect global growing conditions to support record-breaking crops.

If weather trends turn for the worse any resulting degradation in yields will have a huge impact on global inventories. Any adverse weather conditions in any of the world’s growing basins negatively impacting yields could cause global grain inventories to swing from record surpluses to huge deficits in a very short time with huge upward pressure on grain prices. With a heat wave hitting many of the worlds wheat growing regions any restriction on supplies that might force prices even higher (wheat futures are already up one third this year) is jumped on by the market.

Related post: A growth business: Potash market shows signs of life