[miningmx.com] — THERE are more than a few investors who have long regarded platinum as the “default option” when it comes to investing in South African mining stock. I would beg to differ.
And even argue, in some instances, that it may be best – for now – to leave this precious metal in the ground. Things aren’t going well with world demand for platinum and the metal’s current price.
The share prices of SA’s platinum producers are doing even worse. Most of the share prices have been lower than their 200-day moving averages for quite some time. The technical analysts say that’s a sure sign the market is in a bear phase. SA’s once glamour industry and most important earner of foreign exchange is looking very dull at the moment. Remember, SA has in fact already lost its place as the world’s top gold producer.
The root cause of the uncertainty and weakening market for platinum lies in the vehicle manufacturing industry, which is currently restructuring itself around palladium, platinum, diesel, petrol or even electrically-powered vehicles, such as General Motors’ Volt, which was named “Car of the Year’ in 2010.
The dynamics of the vehicle manufacturing industry tell an extremely important story for existing and prospective investors in platinum producers’ shares.
Currently around 77 million vehicles are produced worldwide. About 75% of these are petrol-driven; light, diesel-powered vehicles are around 20% of the total. The rest are heavy vehicles.
However, the 20% light, diesel-powered vehicles account for the demand for almost 75% of the approximately 3 million ounces of platinum used by thee automobile industry a year. Light, diesel-powered vehicles are clearly the salvation of the platinum industry.
Europe totally dominates the production and consumption of light, diesel-powered vehicles. In fact, the importance of the United States and Japan in the production of these vehicles is minimal.
Currently things aren’t going at all well in Europe, even though Germany’s economy is booming. The production of light, diesel-powered vehicles has levelled off significantly this year. The investor should provisionally look at the story of Europe in 2009, which would therefore be the rest of the world, when significantly fewer diesel-powered vehicles were produced. That alone resulted in a surplus of around one million ounces of platinum. Although the situation improved last year, estimates are that the industry is heading for a surplus of around two million ounces over 2011/2012.
In the past two years, the US has fallen in love with palladium, which works as well as platinum as a catalyst. Japan and most other motor manufacturers in the East have long since preferred the cheaper palladium to platinum. It’s basically Europe and its micro-diesels – now becoming very popular in SA – that really rely so heavily on platinum, making us feel so sure of our industry. Without new economic activity in Europe, demand from that source won’t be anything to write home about.
Platinum is also known as “white gold’. In fact, a platinum ring – especially if it’s adorned with a nice diamond – attracts more attention than gold. That jewellery value of platinum results in its price being closely linked with that of gold – and that’s not always a good thing. The ongoing uncertainty about the world’s monetary system means speculators have already pushed the gold price up to more than $1,600/oz and platinum just tags along. That makes platinum too expensive relative to palladium. And remember: once a platinum manufacturer or consumer has switched to palladium, a significant shift in the different prices is necessary to restore the original relationship.
ETF OVERHANG
An exchange-traded fund (ETF) is often a great evil for producers, but sometimes it’s also the salvation for an industry. The purpose of an ETF is to make it easier for the investor to invest in a precious metal, such as gold or platinum. Rather than buying a Krugerrand – if he believes in gold – the South African investor can equally safely buy Absa’s ETFs with the JSE code GLD. Absa and its supervisor ensure there’s at all times just as much physical gold held in safekeeping as the amount of paper ETFs issued. For the investor, the advantage of that is you don’t have gold coins lying around your house.
The current market value of the local GLD on the JSE is already more than R17bn – more than the market value of all Satrix’s ETFs combined. That confirms the popularity of this kind of instrument among investors.
The market value of GLD – the gold ETF trading on Wall Street – is currently $63bn, which is around a third less than the $92bn market value of the Spider: that is, the ETF on Wall Street’s S&P500. Or, to put it differently, the share market’s 500 biggest companies in terms of market capitalisation.
Over the past two years the underwriters of the various listed palladium ETFs had to buy more palladium, measured in ounces, than the underwriters of platinum funds. That could set off a number of alarm bells. The latest survey of the platinum and palladium markets by the authoritative GFMS clearly sketches a more optimistic picture for palladium. For example, if investors in the different ETFs were to decide to switch from platinum to palladium – or merely just to downsize their new investments in platinum – the supply/demand ratio of platinum would weaken even further.
The total holdings of platinum and palladium by the different ETFs is currently around 3,500,000oz in both cases. That’s less than 50% of annual production. But the danger of even a small new supply of 500,000oz from that source rather than the traditional stockpiling could seriously upset the market.
Comparing the movement in the stocks of platinum and palladium over the past two years already shows 2009’s surplus of 507,000oz of palladium turned around to a new deficit of 784,000oz last year. The annual platinum surplus – which fell from 1,157,000oz in 2009 to 412,000 last year – looks a bit disturbing. There are already observers of the SA market who believe the surplus for this year will again be more than one million oz. Of course, surpluses are carried over every year until they become too big – and then the prospects for the sector will definitely look bad.
MARKET SURPLUS
The current composition and independence of the various platinum producers make any significant drop in production extremely unlikely. Leon Esterhuizen, of RBC Capital Markets, caused some consternation recently with his remark that it was a mistake for the predominantly black empowerment platinum producers from the eastern parts of the Bushveld to come on so aggressively over the past few years.
According to Esterhuizen, not one mine is currently making a profit but at the same time they don’t dare to shut down. For the big ones, such as Impala and Amplats, it’s not easy to reduce production. Their smaller shafts probably already produce more than 250,000 oz/year. To shut down a shaft, or even to withdraw it, would cause a serious upheaval and could create labour unrest for the whole mining group.
The prices of platinum shares had a wonderful run over the past five decades and made many new millionaires. However, it now looks as if the sector has landed in a serious hole. Rather than managements tackling problems such as productivity or the question of mining marginal ore, it looks as if they’re putting more time into dreaming up excuses. The most convenient of those, of course, is the rand’s value is too high and that electricity is too expensive. Like the gold mines in the past, SA’s platinum mines seem to be struggling in an environment where the rand isn’t devalued every year and the electricity price is market-related.
– The column first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.
