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Platinum producers get more for less
James Allan
Posted: Wed, 05 Mar 2008
[miningmx.com] -- COMMODITY prices are reaching new highs and yet there is turmoil and uncertainty in global equity markets. Oil, coal, platinum, diamonds, gold, ferrochrome and base metals are all performing well and in some instances scaling new peaks.
There appears to be a dislocation between the state of the American economy and the underlying fundamental demand supply situation driving the price of commodities.
Rallies in metal prices have occurred many times before and have always been subsequently followed by dismal times. Invariably the grim times have generally lasted longer than the good times. What makes the cycle any different this time?
During the 1950’s and 60’s the metals markets were driven primarily by the growth of the middle class in America and the recovery in Japan and Europe. This demand was driven by tens of millions of people; notably the baby boom
generation, the growth of the “two-car” family and demand for household appliances and housing.
The rally in the 90’s was driven by expectations that the rebuilding of Eastern Europe would fuel metal demand; this was dashed by the collapse of the military might in the Soviet Union and the sale of stockpiles by that economy.
The current boom is driven by a number of factors: there are
hundreds of millions of people in China and India that are now either middle class or are set to arrive there and are consuming on a scale that has not been seen before. The rate of urbanisation in China equals the population of South Africa every year. Just imagine the entire population of South Africa moving from rural areas to the city and starting to earn and consume….
Demand for metals, oil and luxuries such as diamonds is likely to see levels in the next decade that have not been seen before. More people equals more demand.
What about the supply side? Exploration expenditure has grown from a trough of less than $2bn in 2002 to over $7bn in 2006.This was no doubt higher in 2007 and will be even higher still in 2008. Nearly half of the exploration spend is on gold and a third is on base metals. Less than 3% is on platinum group metals. Large world class deposits will still be found but it is harder and more expensive to find them let alone bring them on stream.
There is a scarcity of skills, not money in the mining industry. Costs of production have also risen.
Mining companies are awash with cash and a sure sign that new projects are scarce is when they start feeding on each other. BHP Billiton’s bid for Rio Tinto is a sure sign that it is easier to buy someone else than to find and develop your own world class mines. Corporate activity is on the increase.
South African mining companies are struggling with a fundamental problem; there is not enough power to go around. For decades we heard the cry, “cheap power in South Africa!” and this led to the development of the large smelters of Hillside and Mozal (although in Mozambique it is on the same power grid). Aluminium was the way to add value to coal and export it. BHP Billiton came to the table to add value to South Africa’s value added drive and it is hardly their fault now that there is a power shortage.
Yes Mr Mbeki, the economy has grown better than
expected but where were the experts in Eskom who were looking at the long term strategy and planning? And indeed where were they in the mining industry and at the stockbrokers conducting research on the economy and the mining companies?
In the mid-1990’s research showed that South Africa needed to start building a coal fired station to meet demand in a decade. When the competition to Eskom told government they couldn’t/wouldn’t build a station based on the low electricity tariffs, where were the alarm bells? So we have less power. Rolling blackouts in the cities have gone (for now) because the mines are having to tighten their belts and make do with 10% less.
South Africa is a major supplier of platinum group metals and ferrochrome to the world markets. Together these two industries consume around 13% of South Africa’s power. Less power for these industries and the world sits up and takes notice. The result: higher platinum and ferrochrome prices. Let us not
forget the effect that Eskom has had on the exchange rate. The rand has declined 20% against that other commodity currency, the Australian dollar, since the power story has broken.
So why is less more? If the platinum producers lose around 10-20% of their output this year that increases the deficit in the platinum market but they are achieving nearly R600,000 per kilogram of platinum group metals compared to R331,000 per kilogram in early January. So the platinum producers are getting more for less...
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