PLATINUM GROUP METALS

Platinum buying rises as strike disruptions escalate

The biggest loss of platinum supply in at least 7 years has seen investors buying platinum at the fastest pace since 2010.

Author: Nicholas Larkin and Debarati Roy
Posted: Thursday , 06 Sep 2012

LONDON and NEW YORK (Bloomberg) - 

Investors are buying platinum at the fastest pace since 2010 after disruptions at South African mines caused the biggest loss of supply in at least seven years.

Strikes and pit closures meant mining companies extracted 380,000 ounces less than they could have this year, equal to about 6 percent of global output, Deutsche Bank AG estimates. Metal purchases through exchange-traded products were the most in 20 months in August, data compiled by Bloomberg show. Prices will average $1,625 an ounce in the fourth quarter, the highest in more than a year, according to the median of 12 analyst estimates compiled by Bloomberg.

Platinum is now 13 percent higher this year at $1,581.40, having dropped to an almost seven-month low of $1,379.25 on July 24. Photographer: Tomohiro Ohsumi/Bloomberg

Lonmin, the third-biggest platinum producer, says it has been losing 2,500 ounces of daily production since Marikana was shut by a strike Aug. 10. Photographer: Stephane de Sakutin/AFP/Getty Images

The lost production is diminishing a glut that drove prices to within 0.4 percentage point of a bear market in July and below the cost of extracting the metal. The rebound accelerated after police killed 34 strikers at Lonmin Plc (LMI)'s Marikana complex last month. It was the worst mine violence since the end of apartheid in 1994 in South Africa, which accounts for about 75 percent of global output. Hedge funds are now their most bullish since March, U.S. government data show.

"Supplies are going to be challenged," said Nic Johnson, who helps manage $30 billion of commodity assets at Pacific Investment Management Co. in Newport Beach, California. Platinum "moved very close to the marginal cost of production which should put an upward pressure on prices. Any type of outages in South Africa will make it more attractive."

Global Production

Platinum is now 13 percent higher this year at $1,581.40, having dropped to an almost seven-month low of $1,379.25 on July 24. Only silver has gained more this year among precious metals. The Standard & Poor's GSCI gauge of 24 commodities advanced 4.5 percent and the MSCI All-Country World Index of equities climbed 7.4 percent. Treasuries returned 2.5 percent, a Bank of America Corp. index (MXWD) shows.

Global production will exceed demand by 99,000 ounces this year, 77 percent less than in 2011, as South African output retreats almost 10 percent to a decade-low of 4.38 million ounces, Barclays Plc estimates. Supply will contract 6 percent, outpacing a 2.2 percent decline in demand, Barclays forecasts.

Lonmin, the third-biggest platinum producer, says it has been losing 2,500 ounces of daily production since Marikana was shut by a strike Aug. 10. Impala Platinum Holdings Ltd. (IMP) shut its Rustenburg mine, the world's biggest, for six weeks in January after employees went on strike over pay.

Zondereinde Mine

Wage disputes are adding to mining companies' struggle to maintain output. They are now digging as deep as 1.3 miles to find ore, and temperatures at the rock face of Northam Platinum Ltd. (NHM)'s Zondereinde mine in South Africa can reach as high as 162 degrees Fahrenheit (72 degrees Celsius). Lonmin got 4.4 grams of platinum-group metals from every ton of ore last year, 5.4 percent less than in 2010.

Global extraction costs are now about $1,430 an ounce, according to Thorsten Proettel, an analyst at Landesbank Baden Wuerttemberg in Stuttgart, Germany. The average annual price has exceeded that only three times in the past quarter century.

While analysts expect prices to keep rising, they would have to advance another 46 percent to match the record $2,301.50 reached in March 2008. Production fell 220,000 ounces short of demand that year, Barclays estimates. Lonmin made $455 million in 2008 and will report profit of $13.2 million in 2012, based on the mean of 10 analyst estimates compiled by Bloomberg.

Catalytic Converters

Demand may fall short of analysts' expectations because 38 percent is tied to the metal's use in catalytic converters for vehicles. Platinum is used with palladium and rhodium in the canisters with honeycomb-like surfaces that convert emissions into less harmful substances.

The economy in China, the biggest car market, has slowed for six quarters, the 17-nation euro area is contracting, and consumer confidence in the U.S. fell the most in 10 months in August. Europe accounted for 27 percent of consumption last year and China 25 percent, according to Johnson Matthey Plc, the maker of one in three autocatalysts.

"There are potential claims on the supply side, but it's very much the demand that's going to drive prices lower in the coming months," said Ross Strachan, a commodities economist at Capital Economics Ltd. in London. "The largest source of demand for platinum is in Europe, and the one overriding point is the poor state of the European economy."

Rising prices will also spur more recycling. Supply from spent autocatalysts jumped 21 percent in 2008 as platinum surged, according to London-based Johnson Matthey. Total scrapping rose to a record 2.05 million ounces in 2011 as prices averaged an all-time high of $1,721.

Car Sales

Global sales of cars and light commercial vehicles will rise 5.5 percent to a record 81.1 million units this year, according to LMC Automotive Ltd., a research company in Oxford, England. Carmakers will use 3.22 million ounces this year, the most since 2008, and 3.81 million in 2013, Morgan Stanley estimates.

Hedge funds and other speculators almost tripled wagers on rising prices in the two weeks through Aug. 28, U.S. Commodity Futures Trading Commission data show. They now hold a net 20,072 U.S. futures and options, the most since March. ETP holdings reached an 11-month high of 45.3 metric tons on Sept. 4, valued at $2.28 billion and 2.3 percent below the record set in September 2011, data compiled by Bloomberg show.

Anglo American Platinum Ltd. (AMS), the biggest producer, will report profit of 3.03 billion rand ($360 million) next year, from 1.38 billion rand in 2012, based on the mean of eight analyst estimates. The Johannesburg-based company made 3.59 billion rand in 2011. Its shares dropped 23 percent to about 409 rand this year.

"The mines are unprofitable," said David Christensen, who oversees $600 million of assets as chief executive officer of ASA Ltd., a San Mateo, California-based company investing in precious-metal companies. "Increasing labor activity is going to negatively affect production."

To contact the reporters for this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net.

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net