THE decline in platinum group metal (PGM) shares this year might not be over as concerns over global recession combined with inflationary pressure leading to crimped margins.
“It seems the heydays seen in recent years could be drawing to a close,” Nedbank Securities analyst, Arnold van Graan said in an article published in the Financial Mail. He pointed to the last round of operating and financial results from the PGM majors which were a disappointment.
Output was lower while inflation on consumables, including fuel, was pronounced. In addition, safety incidents and the continued impact of Covid-19 – which results in low skills availability and supply constraints – were a drag on performance.
Most producers also reported a sharp increase in capital expenditure which Van Graan put down to higher stay-in-business costs. Northam, for instance, revised its capital expenditure higher, to some R5.4bn for the current financial year which compares to R4.6bn for the year ended June.
The major factor sitting on PGM shares, and which could lead to further weakness, is the headline issue of global recession, especially its impact on automotive production.
Platinum has quite diverse end uses but other members of the PGM family, rhodium and palladium in particular, source about 85% to 90% of their total consumption from the automotive market. Last year’s deceleration in vehicle production, owing to a supply shortage of semi-conductors, resulted in a decline in palladium’s price from $2,400 per ounce to about $1,700/oz for instance.
However primary supply of PGMs, which is dominated by South African producers, continues to be unreliable which is a positive for metal prices. In September, Amplats cut its full year refined PGM production forecast by up to 700,000 ounces following a delay in the commissioning of its Polokwane rebuild project. Since the beginning of the year, the palladium price has regained ground. It’s currently at $2,013/oz, partly assisted by an improvement in semi-conductor supply to the automotive market.
Added to this, the rand exchange rate against the dollar has weakened about 15% since the beginning of the year. This is drives profitability and suggests that PGM producers are likely to report decent margins. So the upshot is while inflation is a challenge for South African miners, metal prices are highly supportive. But how long can it last? Market and structural factors may translate into future earnings weakness.
According to UBS analyst, Steven Friedman, the PGM basket as a whole is still trading above the marginal cost incentive level. He forecasts “material downside risks to sector margins and returns against a backdrop of increasing cyclical and structural headwinds”.
UBS sees a slowdown in automotive production once the current backlog has been worked through, raising concerns about the 2023 outlook.
Structurally, the adoption of electric vehicles is also a risk for PGMs which don’t supply that type of car. “While ICE (internal combustion engine) vehicles are still down 13% in key end markets, the combined EV sales increased about 78% year to date reinforcing the structural demand headwinds from increasing EV penetration rates which will likely weigh on the elevated palladium and rhodium pirces over the medium term,” said Friedman.
