Platinum prices have dipped by 5.2% since the start of 2013. Back in January a survey from the London Bullion Market Association revealed that market participants were expecting average annual platinum prices to rise 8.4% in 2013. So why the drop in prices?
According to HSBC “Platinum has been more influenced than we had anticipated by the sharp swings in the gold price…” as investment demand for the precious metal fell with the gold price. Due to the relatively small nature of the platinum market even small changes in investor sentiment can have large impacts on price. However this may now change as we highlight later on.
According to HSBC platinum prices are now forecast to average $1,580 per oz in 2013, almost 9% higher than Monday’s closing price. The bank sees prices rising even further next year to average $1,725 per oz in 2014 reiterating that at current low price levels, a sizable amount of current production uneconomical. Thus, higher prices are needed if production is to be maintained over the longer term.
So what are the key risks for industrial platinum consumers for the rest of 2013 and beyond?
1) Industrial unrest
Back in August 2012 unrest between rival two South African unions demanding better pay and conditions for their workers and police resulting in over 30 miners being killed and the temporary closure of the Lonmin mine. As South Africa’s platinum mines have become more marginal, deeper, and hotter power interruptions, costs, accidents and unrest amongst miners have risen.
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Statistics South Africa has reported a sharp fall in PGM production in April from a year earlier as the work stoppages stemming from union wage negotiations wreak havoc for producers. Last week no deal was agreed, with the largest union, the AMCU, delaying a decision to strike (until this Friday).
According to HSBC “Miner’s unions are demanding double-digit pay increases, which are well above producer offers. Low prices mean that producers are not in a financial position to meet union pay demands and some producers such as Amplats have built stocks in anticipation of production interruptions, due to strike action.”
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2) Power cuts
South African power supplier, Eskom, reported last week that power demand exceeded supply by the largest margin since 2008, raising concerns about potential power shortages. The mining industry has been plagued by power interruptions, however without electricity market reforms the state electricity, Eskom is likely to continue to struggle to improve its energy infrastructure.
3) Cartel between South Africa and Russia
Plans for an Opec-style approach to controlling the world’s platinum supply resurfaced in late May. The arrangement, if it were to get off the ground would see the two largest platinum producers South Africa and Russia act to restrict output in order to force the price up.
The idea is likely to be something of a long shot however. SBG Securities highlight contractual issues as a major barrier “How are they going to establish a bloc such as this, and how are they going to break existing contracts with the autocatalyst producers?” Irrespective of this and any legal issues, even if it was achievable it would only force semi-fabricators into substitution towards another metal suitable for autocatalysis.
4) The South African platinum ETF
The launch of the South African ETF in mid-May has attracted 371,000 oz of platinum which may have otherwise been available to industrial customers. “While we do not expect this rapid pace of accumulation to continue,” HSBC state “we do believe platinum ETF investment continues to benefit from investors who are seeking hard assets, and may also attract some investors from gold.”
Industrial buyers should note that the launch of the ETF may mean that platinum price movements are increasingly detached from underlying demand/supply fundamentals in a similar vein to gold prices.
