The JSE’s four largest platinum miners cut nearly R30bn in planned capital and stay-in-business expenditure in February in a clear vote that the metal’s price, and those of its palladium and rhodium co-products, will be lower for longer. Far longer, in fact.
Northam Platinum CEO Paul Dunne said at his firm’s interim results presentation on March 1 that it could take two years before bad market sentiment in platinum group metals (PGMs) shakes out. That’s sobering news for a sector that paid record dividends only two years earlier.
2023 was a year to forget for the PGM industry. The price of palladium fell 40%; rhodium was 62% lower year on year. Despite that ravaging, the average PGM basket price continued to slide in January and February, down 4.2%. Platinum, which has the best fundamental outlook of the three metals, was 10.4% lower in those months.
What’s more, price behaviour seems to confound the short-term supply and demand outlook for the metals.
According to first-quarter data from the World Platinum Investment Council (WPIC), platinum is heading for a 418,000 oz supply deficit this year. Were that to materialise, it would result in a cumulative deficit of 1.2 million ounces since the beginning of 2023, just before prices started to deteriorate significantly. Deficits are also forecast for palladium and rhodium this year.
But deficits be damned; trading activity seems to reflect a different reality.
Managed money positions in palladium at the end of February were at a record net short of about 1.3 million ounces. Then, quite suddenly, short covering totalling 60,000 oz triggered a sharp $200 an ounce gain. The metal has since stayed above $1,000 an ounce in a suggestion that PGMs like palladium will be highly volatile.
Aside from trading activity, the drivers behind demand seem equally opaque. “It’s really uncertain,” says Craig Miller, CEO of Anglo American Platinum (Amplats). “What will happen from a macroeconomic point of view; when will interest rates come down; when will people buy a new car?”
Most PGMs are used in autocatalysts fitted to vehicles. Elevated interest rates, likely to remain in place until June, according to recent commentary from the US Federal Reserve, deter consumers from buying new cars, and have the effect of stunting investment demand for non-yielding platinum. In addition, the market is still uncertain about the extent of metal inventories held by carmakers — a carryover from Covid — and a semiconductor shortage, which hindered automotive production for about 18 months after the pandemic.
Eventually, poor automotive sales will result in lower secondary supply in the form of scrapped metal, but for now the PGM markets are dominated by another uncertainty, which is the extent to which traditional internal combustion engine (ICE) cars can continue to thrive in the face of electric vehicle absorption.
It’s really uncertain. What will happen from a macroeconomic point of view; when will interest rates come down; when will people buy a new car? – Craig Miller, CEO, Amplats
Or is it vice versa now?
According to S&P Global, automotive production might grow only 0.5% this year, but that negative could be offset by slowing sales of battery electric vehicles (BEVs). BEV sales in China — which accounts for roughly 61% of global BEV sales — fell in January, according to a report by RMB Morgan Stanley. That may open the door for hybrid vehicles, which use some PGMs in a type of engine that is fairly familiar to consumers but which has a lower carbon footprint than conventional petrol or diesel engines.
Hybrids
One PGM executive who thinks hybrid vehicles will have their day is Neal Froneman, CEO of Sibanye-Stillwater. The company fell under huge pressure last year, sliding into net debt of R11.9bn from R5.8bn in net cash a year earlier. It has cut R6.6bn in expenses but is still loss-making at its Stillwater palladium/platinum mine in the US.
However, Froneman thinks the market pessimism regarding PGMs will soon be lifted. “I don’t sit here believing these commodity prices are here for the long term, and it’s not a wish,” he says.
“There are some fundamental changes occurring. First of all, there’s a realism on batteries and battery electric vehicles,” he says, citing an announcement from BMW that it would not proceed with BEV production, preferring another PGM technology, fuel cells. Says Froneman: “Ever since we entered the battery metals space the penetration rates are overstated.”
As for palladium, the loss of market share of Western vehicles in China in the ICE category, such as Mercedes-Benz, has hurt demand for the metal because Chinese equivalent vehicles are not as emissions efficient. And in rhodium, Chinese fibreglass manufacturers have stopped using an 80%/20% platinum/rhodium alloy in favour of an alloy using only 5% rhodium. This has hammered the metal’s demand.
“On the face of it this seems small, but when you do the numbers it is not small,” says Dunne. “We believe we have lost about 30,000 oz of annual demand from the rhodium market, which is only a 1.2-million ounce market and which is finely balanced.
“These are very material changes. Put it all together and the basket [the overall price received for the mix of PGMs metals produced by the South African platinum companies] has almost halved,” says Dunne. “If your revenue halves and your cost inflation is north of 10%, which it has been in the past couple of years, you really have a hell of a squeeze on the margin.”
Supply under pressure
Adding to opaque trading patterns and uncertain demand is the third market unknown: exactly how mined supply will reduce, even assuming Russian production remains flat (it won’t).
Sibanye-Stillwater cut about 50,000 oz in annual PGM production while Impala Platinum (Implats) announced plans to reduce production in a phased manner by as much as 300,000 oz a year over five years, saving it R10bn in capital costs. The WPIC estimates platinum supply will be 3% lower this year, with the lion’s share of the reduction being from South Africa.
We believe we have lost about 30,000 oz of annual demand from the rhodium market, which is only a 1.2-million ounce market and which is finely balanced. These are very material changes. – Paul Dunne, CEO, Northam Platinum
Despite these efforts, and about R10bn in savings announced by Amplats in December, South African miners may still not be doing enough to convince the market.
“The reality is that there have been number of announcements on restructuring but no fundamental change on guidance,” says Ed Sterck, head of research at the WPIC. Production cuts so far are equal to about 220,000 oz this year, but there is still significant high-cost production in the residual cost curve, he says. “Producers are reluctant to shutter as there is a financial and social cost attached. If more drastic action was manifest it could have an impact on prices.”
That “more drastic action” may materialise later this year, because the PGM miner which stands the chance of the best rating is the one able to best manage its balance sheet. For now that would appear to be Northam.
Though Northam took a loss on the sale of its Implats shares after its decision to withdraw its offer for Royal Bafokeng Platinum in April last year (which it did by selling its 34% stake to Implats in terms of its share/cash offer), it still reduced net debt to R2.4bn from R12.3bn a year earlier.
Futures positioning is incredibly short, the shortest it’s ever been. That is based on the perceived wisdom that palladium is entering a sustained market surplus, possibly from next year. But if you dig into the weeds, the surplus for palladium is not the result of demand tailing off, which is what a lot of people assume – Ed Sterck, WPIC
Dunne has announced several initiatives to defer and reschedule non-essential capital projects which may hurt medium-term targets, said UBS analyst Steve Friedman in a note in February. But in the short term it is growing production, which helps contain inflation. “Staying the course,” says Nedbank Securities analyst Arnold van Graan of Northam. He recommends investors be overweight in the stock.
Northam’s project deferrals, all mostly to do with non-essential items, are nothing of the scale of cutbacks likely from Implats and Sibanye-Stillwater. As for Amplats, restructuring potentially affecting 3,900 employees could be deepened if PGM prices remain low. Duncan Wanblad, CEO of Anglo American — which owns 79% of Amplats — said the group would consider reducing production further at Amandelbult.
Much depends on the future market direction. One danger PGM miners are cautious of walking into is restructuring assets in such a way that it’s not possible to capitalise in the event of an upcycle, remote (or uncertain) as that might seem today. But it can change, as history has shown.
Market consensus is based on acceptance that palladium is heading for a supply surplus, says Sterck. But this could be incorrect. “Futures positioning is incredibly short, the shortest it’s ever been. That is based on the perceived wisdom that palladium is entering a sustained market surplus, possibly from next year. But if you dig into the weeds, the surplus for palladium is not the result of demand tailing off, which is what a lot of people assume.”
It is rather, he suggests, the expectation of a significant increase in recycling supply of more than 1-million ounces. Were that not to come through, and there is significant risk on recycling supply, the outlook for palladium is different.
First, traders who are short the metal will need to unwind those positions in double-quick time, itself a price positive factor. Then there are the potential cuts in mined supply.
“If it all comes through in a market so heavily shorted, that could translate into a pretty substantial short covering rally,” says Sterck.
This article first appeared in Investors’ Monthly produced with the Financial Mail.
