Four key risks for industrial platinum users

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.

Graph of Platinum Prices ($ per oz)

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.

Related article: What impact will Marikana unrest have on platinum price?

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.”

Related article: Geopolitical risk: What are the commodity market hotspots?

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.

 

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Food prices to stay high despite lower grain prices

Sequía/Drought
Claudio.Ar / Foter.com / CC BY-NC-SA

Record harvests are likely to see grain prices lower this year, according to a report from the UN Food and Agriculture Organisation. However they cautioned that meat, fish and dairy products are likely to stay near record highs. Why is this and how long before these prices also come down?

Dairy product prices normally react very quickly to changes in drought conditions and underlying feed costs. High heat means stressed out cattle and poultry, resulting in fewer eggs and less milk being produced. Dairy producers can reduce costs by replacing some feed grains with forage. However, there is a trade-off—as dairy producers increase forage use, average milk yields will decline.

Over the past year milk production in the US and Europe has been adversely affected  by poor weather conditions while in New Zealand (the top exporter) a severe drought affected output growth. So while drought conditions in the US and grain prices moderated milk prices doubled. According to New Zealand-based Fonterra, the world’s biggest dairy exporter, dairy commodity prices “will continue at or near current levels until the fourth quarter of 2013,” with weak supply growth of 0.5% acting to support prices.

Related article: Dairy prices to stay near record levels

UN FAO food price index chart

According to the UN FAO “Prices on a number of farmed species, including salmon, shrimp and selected bivalves, have risen sharply, due to supply problems and higher feed costs. Some capture fisheries species, including tuna, have also registered sharp increases…In the coming months, supply constraints for several important species are likely to keep world fish prices on the rise.”

Focusing on feed costs (known as fishmeal), prices hit a record high at the start of the year near $2,200 per tonne. Since then prices have declined by about 15% but remain at historically high levels so are likely to remain supportive.

Graph of Fishmeal prices ($ per tonne)

“Meat prices have remained at historically high levels since the early part of 2011,” the organisation warned as producers continue to struggle against elevated feed costs. However, due to the long timeline involved with livestock production, particularly cattle a drop in feed costs is unlikely to result in a quick fall in meat prices.

Livestock production timeline

When feed costs rise livestock producers initially continue to feed their animals in the production queue, while eliminating their least productive animals and cutting back in less profitable areas of their operations. However, eventually farmers reduce the size of their herds. According to a report from the University of Missouri, the total number of cattle and calves in the US shrunk to 89.3 million as of the start of 2013, the smallest number of cattle since 1952.

Related article: How will the US drought affect food prices?