PLATINUM shares on the Johannesburg Stock Exchange defied the odds for most of this year; at least, those set down by investment analysts who earlier thought the likes of Anglo American Platinum (Amplats) and Impala Platinum (Implats) had run too hard and were due a major correction – a forecast that may be materialising.
Despite recent weakness in platinum equities, Amplats is still 97% higher in the year-to-date whilst Implats is up 117% even though analysts think the company is not yet generating any cash after capital expenditure. Even Lonmin, a firm that courted bankruptcy last year, is 74% higher.
This is despite obvious moves in the dollar price of platinum. The price of the metal has fallen from its August high of $1,171 per ounce to about $940/oz at the time of writing. Nonetheless, this is still about $110/oz higher than in mid-January when the platinum industry looked in real peril.
Analysts, however, continue to guard about the sector with the latest warning coming in the form of automotive sales which provide a market for 80% of palladium sales and 40% of platinum through the legislated manufacture of autocatalysts which remove noxious fumes from car exhausts.
A recent softening in the price of palladium is related to an announcement by General Motors that September sales were down 0.8% month-on-month and 8% down against sale in the corresponding month of the previous year. This has led to concerns that the US auto market is levelling off after a six-year climb.
Goldman Sachs thinks automotive sales will increase 1% for 2016 but fall quite heavily by 7% and 5% in 2017 and 2018 respectively. “As auto sales level off – both in the US and Western Europe – it should put downward pressure on the already under pressure autocat demand for both the metals,” the bank said.
“Add to that the ramping up in supply in South Africa – both from existing mines and new mines coming online – we believe it sets the stage for metal under-performance,” it added. Goldman Sachs repeated its relatively long-standing view that it was bearish on PGM equities in general.
Macquarie, the Australian bank, believes the relatively strong performance for car sales this year represents something of “a statistical illusion” because they compare to a low base in 2015.
As for 2017, PGM sales into the automotive sector may be affected by, as ever in the commodities markets, the Chinese.
A tax incentive on small vehicles is due to expire this year which may crimp sales next year. Added to that the US market is struggling and catch-up in vehicle sales which has been a feature of the European market in the past few years is almost complete.
Sale of diesel vehicles, which is a larger market for platinum than palladium owing to the way autocatalysts are fabricated for diesel engines, is also under pressure owing to declining popularity for the engine.
The other side of the equation is the ability of South African producers to increase supply of PGMs. Whilst Goldman Sachs thinks that production will increase from South Africa, despite the possibility of a wage strike this year, Macquarie believes market pressure will begin to take their toll on the platinum miners.
“Over time, the severe lack of investment will begin to take its tool, however, not just in lower capacity but more frequent safety and other stoppages, and we forecast production to decline slowly,” said Macquarie.
South African platinum supply is forecast to be 4.7 million ounces excluding supplies from inventories, a decline from the 5.01 million oz supplied in 2015 of which about 182,000 oz was from inventories, according to Macquarie. Supply falls further in 2017 and 2018 down to 4.6 million oz in both years, the bank said.
