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Analysts raise platinum state of alert
Brendan Ryan
Posted: Mon, 10 Nov 2008

[miningmx.com] -- AS IF conditions in the platinum group metals (pgm) markets were not already bad enough, both RBC Capital Markets and JP Morgan have put out research reports warning of worse to come.

RBC Capital Markets analyst Leon Esterhuizen reckons there could be an oversupply of as much as one million ounces of platinum during 2009, while JP Morgan analysts Steve Shepherd and Allan Cooke are only slightly less pessimistic, forecasting a surplus of about 750,000oz.

But the JP Morgan analysts arrived at that figure by assuming mine managements would take steps to cut back in certain areas and drop production.

Had the analysts stuck to the official “guidance” on future production currently given by mine managements, their estimate would be for a surplus of 900,000oz.

The reasons for their predictions are that the platinum supply will increase in 2008 and 2009, while pgm demand from the automobile industry will continue to fall.

Esterhuizen commented that many market pundits are now placing a huge amount of faith in the loading component, given Euro Five legislation kicking in during 2009, to save the day.

“Unfortunately, as the drop the auto sales numbers very clearly indicates, the biggest impact is in the larger segments - the luxury limos and the SUVs. These are the real contributors to higher average loadings; the situation gets even worse because the big diesel truck sales have also come off a cliff, with Volvo trucks recently recording a 97% drop in sales year-on-year.”

Esterhuizen expected higher platinum production from a number of junior companies, while Shepherd and Cooke stressed the difficulties faced by SA major producers in cutting back on loss-making production.

The JP Morgan analysts estimated that, at current price levels, “some 45% of the industry in southern Africa is under water if maintenance capex is taken into consideration.”

Shepherd and Cooke said: “SA’s labour dispensation offers an inordinate level of protection to employees and their unions at the expense of the employer. We would suggest that this makes it very hard for the miners to respond to market conditions in a timely way - where miners elsewhere can and do.

”The local miners that attempt to respond to market dynamics quickly risk labour unrest, court actions and possibly punitive measures as a consequence.

“At the moment we have seen only marginal adjustments to mining plans that will make no difference to the prospect for substantial market surpluses in all the key pgm markets.”

Esterhuizen cited a leaked document from Lonmin indicating an imminent downscaling exercise but said: “We are yet to see any announcements about any mine closures or production cutbacks from the other majors.

“Although RBC Capital Markets believes it will happen, it believes it will only be once big losses are being made - probably deep into 2009. “

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The short-term outlook, according to Esterhuizen, is for “an absolute crash in company earnings as restructuring costs wipe out any profits - assuming there still are profits at that stage.

“RBC Capital Markets believes the pgm space has real capacity for another pull-back from current levels,” he said.

The JP Morgan analysts were not as stark in their conclusions but they said: “Despite sharply lower share prices, we advise caution. Unfortunately, we expect low prices to be around for some time and, at the moment, judging the timing of the recovery is really very difficult.”

The only piece of good news that Shepherd and Cooke could find was to point to the impact of the deferral of expansion projects that must take place if there is no rapid and substantial recovery in pgm spot prices.

They said: “Should some of the projects be deferred then, come the recovery in demand growth at some stage in the next few years, the scene may be set once again for runaway pgm prices as supply shortages begin to bite. This is the essence of any commodity cycle and platinum is no different.”