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Platinum prices seen spiking higher due to “dire” supply constraints

With the strike of the world’s third largest platinum mine stretching into a fifth week, the metal’s price remains supported due to supply-side concerns, making analysts bullish on its future.
Platinum prices seen spiking higher due to “dire” supply constraints
With the strike of the world’s third largest Platinum mine stretching into a fifth week, the metal’s price remains supported due to supply-side concerns, making analysts bullish on its future.

Platinum prices made solid gains last week on the back of continuing labour disruption and uncertainty in South Africa, where 44 died last month as violence erupted. Although a peace accord was signed between Lonmin (LON:LMI), the owner of the Marikana mine, and representatives of striking miners, the accord did not include the militant AMCU (Association of Mine Workers and Construction) union at the centre of the dispute.

Only about 2 per cent of shift workers were reported Friday to have turned up to work, Lonmin said, and about 6.3 per cent on Monday, with an estimated 50,000 ounces of Platinum production thought to be lost as of last week because of the disruption. And the strikes are spreading across the country, with Gold Fields (NYSE:GFI) the latest to report another illegal stoppage at one of its gold mines.

Wage talks to end the month-long Lonmin strike failed to start as scheduled yesterday, with a vast majority refusing to return to work by the Monday deadline. Labour Minister Mildred Oliphant said today that striking workers at the Lonmin mine must return so negotiations can continue.

Platinum prices have also tracked gold higher, as central bank action in Europe and hints of Fed action in the US have supported precious metals.

Last week, ECB president Mario Draghi unveiled a plan to buy distressed eurozone countries’ short-term bonds, with markets rallying in response. And on Friday, a disappointing jobs report in the US further stoked hopes for another round of quantitative easing ahead of a Fed policy meeting this week.

Platinum is currently trading at around US$1,607 per troy ounce – below gold at $1,739 an ounce.

This is not strange for the metal, as the price of Platinum has varied widely. According to specialty chemicals company Johnson Matthey, more than a century ago, it was cheap enough to be used to adulterate gold, and was nearly eight times as valuable as gold in 1920.

“I’m bullish on Platinum for the remaining part of this year, based not on expectations of stronger demand, but rather on dire straits of supply,” says Kirill Kirilenko, precious metals analyst for global mining and metals experts, CRU.

He says demand remains weak in Europe and abroad due to the overall slowdown of the economy, but there have been “quite a few strikes” on the supply side.

The strikes were sparked by a turf war between the established National Union of Mineworkers (NUM), which is closely affiliated with the current governing party, and AMCU at the Marikana mine, and has led to about 3,000 of Lonmin's 28,000-strong South Africa workforce to walk out.

“The recent and ongoing turmoil in South Africa is primarily a human tragedy but it has also highlighted the fragility of the global Platinum supply,” says investor relations manager of Yukon-focused Prophecy Platinum, Chris Ackerman.

“The result was a major spike in price and the continuation of violence and labour strife many are predicting could propel this trend well into the future – particularly if things get worse.”

Kirilenko says he expects labour unrest to intensify in the next 4 months due to the nature of the turf war between the two South African unions, and with the governing party's leadership elections taking place in December lending further scope for disruption.

“This pressure will result in the market surplus shrinking down by 65% from what it was in 2011,” he says.

“This is enough impetus for the market to go higher because of the pressure from the supply side.”

He forecasts the market surplus will continue shrinking next year as well, as demand will improve due to the introduction of the Euro 6 emission standard in Europe - which is a major consumer of diesel cars, that are equipped with Platinum-rich catalytic convertors.

Aside from its obvious uses in jewelry, Platinum is also used in wire, as a corrosion-resistant apparatus, and in many industrial products. It is also an excellent catalyst, having long been used in the contact process for producing sulphuric acid, and as a catalyst in cracking petroleum products. There is now a lot of interest for the use of the metal as a catalyst in fuel cells and in anti-pollution devices for automobiles.

In 2011, autocatalysts accounted for 31 per cent of Platinum demand, according to Johnson Matthey.

The new Euro 6 emission standard for vehicles enters into force in the EU starting on 31 December 2012 for new heavy duty diesel vehicle models, and one year later for all vehicles in an effort to limit pollution by cars.

All vehicles equipped with a diesel engine will eventually be required to substantially reduce their emissions of nitrogen oxides – a positive for Platinum, which is why CRU expects Platinum demand to improve in 2013.

Indeed, positive U.S. car-sales data last week helped support Platinum prices as well, with global car sales up 6 per cent in the first half of the year.

But at the same time, Kirilenko says supply of Platinum is likely to continue sliding next year too because the launch of some projects may get delayed due to lack of financing. Also, some of the mines which were delivering Platinum on the market in 2012 might not contribute to the metal supply in 2013.

“Already, a number of companies have postponed capital expenditures due to the current difficult market environment, and two mines owned by Aquarius Platinum (LON:AQP) were put on care and maintenance, with a third mine [namely Smokey Hill owned by Platinum Australia] also possible but not yet officially confirmed.”

Though the supply issue remains a major supporting factor for Platinum, with an overall 200,000 ounces estimated to be lost to the strikes in South Africa, Kirilenko says that ultimately, the price of the metal will depend on Federal Reserve chairman Ben Bernanke, and his announcement of any QE3. This is because investors tend to seek out hard assets, including Platinum, to protect their financial capital from devaluation when monetary policies become more accommodative.

CRU’s average forecast price for the metal this year is $1,600 an ounce. Its average price in the last month was US$1503.77 an ounce.

"The Platinum group metals pipeline from production to refinery to end users is very, very thin - there are not large stocks of the metal," says Ross Norman, owner of London-based bullion broker Sharps Pixley.

"This means when there is a dislocation, there are huge price spikes, which we have seen with Platinum previously," he says, adding that it is too early to say if this will happen again with Platinum and depends on how long the South Africa strikes drag out.

Norman says that Platinum could well go to $1,850 an ounce - back at a premium to gold - but this will be largely driven by the crisis in South Africa, from where 75 per cent of Platinum’s global supply of 6.48 million ounces hailed in 2011.

Looking ahead, CRU’s Kirilenko believes the dispute with the unions will continue, with the industry set to go through its bi-annual round of negotiations between Platinum producers and unions next year.

The risk of labour-related disruptions, however, may be reduced if Platinum producers in South Africa eventually decide to present themselves as a united front. “The thing is that wage negotiations in the South African mining industry are carried out differently,” says Kirilenko.

“For example, in the gold industry, there is collective bargaining. Gold miners are members of the Chamber of Mines of South Africa, and they act as a united front.

“But with Platinum, it is different because every Platinum producer negotiates with employees on their own, creating a potential problem,” he says, adding that unions tend to honour agreements made with companies less than if they were made through the Chamber of Mines.

A number of Platinum companies are considering joining the Chamber, with one having already joined, says Kirilenko, which could potentially ease labour tensions in the country’s Platinum mining sector. But this will only have an impact in the medium to long term, he adds.

“If they can manage to join by next year, negotiations in the summer between producers and unions will be easier and potentially result in fewer disruptions to primary Platinum production,” Kirilenko concludes.
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