[miningmx.com] – THE diversified mining groups Rio Tinto, Vale and BHP Billiton are banking on their combined low cost iron ore supply knocking out the smaller players which will lead to yet more concentrated supply and even price control.
In the case of platinum group metals (PGMs), and specifically platinum, control of the market by a few doesn’t stand for much, especially as new production from lower cost producers is likely to pressure the status quo into restructuring and even closures.
South Africa controls about 70% of world platinum production, and about 96% of total world resources, and yet the sector remains deeply troubled by the after-effects of an enthusiasm for expansion that pre-dates the commodities super-cycle.
Goldman Sachs estimated that after creating almost 100% of shareholder value over 2006 to 2010, total shareholder returns since 2010 by the Big three platinum producers – Anglo American Platinum, Impala Platinum (Implats), and Lonmin – have declined by more than 50% owing to the poor platinum price.
There is an estimated supply deficit of some 235,000 ounces, according to the World Platinum Investment Council (WIPC), but this doesn’t take into account above ground stocks which, at about 2.7 million oz, is enough to take the shine out of the platinum market.
So great is the apathy that not even a five-and-a-half month strike in the platinum sector during 2014, equal to 1.3 million ounces in lost production was able to drive the platinum price higher. Supply from recycling, a relatively new phenomenon, is also putting the screws on platinum.
Analysts think the platinum market will eventually improve.
Paul Wilson, CEO of WIPC, said that above ground stocks would fall 8% this year, while Allan Cooke and Abhishek Tiwari, analysts for JP Morgan, think that US interest rates and an improvement in the world economy will also combine to help platinum out of its current doldrums, somewhere between $1,300/oz to $1,388/oz versus $1,700/oz in 2012.
“For us, the question is “when’ rather than “if’ platinum prices will move higher with the timing of this call determined by the direction of the dollar and US interest rates, available stocks of metal in the market and the global macro-economic outlook,’ said Cooke and Tiwari.
Unfortunately, this is no help to the platinum producers in South Africa, of which more than half are estimated to be burning cash after capital expenditure. JP Morgan said that restructuring was inevitable, possibly through swaps of property.
Goldman Sachs agrees, to a point. It thinks 400,000 oz to 700,000 oz of platinum needs to come out of the market in the next 12 to 36 months, but it’s unsure how politically feasible this is based on previous government and union opposition, even if a leaner industry would have broader fiscal benefits down the line.
“With potentially 1.2 million oz of low-cost supply slated to come online in the next three to four years, restructuring we believe will not be an option,’ it said in a report dated 14 May.
According to a report by Deutsche Bank analysts Anna Mulholland and Patrick Mann, however, meaningful consolidation in the PGM supply may be possible through the ‘logical’ combination of Implats with Lonmin.
At a market value of R15.6bn at the time of writing, Lonmin’s 750,000 oz a year in production would equal the replacement cost of one of Impala’s Lease Area shafts in Rustenburg.
They also calculated potential savings of R1bn a year through the elimination of duplicate processing costs, given that Implats has spare capacity in its refining services. As a result, the capacity utilisation of Impala Refining Services would increase to 80% from 50%, a step that would also improve unit costs.
In the meantime, there’s little comfort for the investment world.
Investec Asset Management analysts Hanre Rossouw and Daniel Sacks believe that there may be an opportunity because of the way that commodity shares have traded, but not in the case of platinum stocks.
While they believe the platinum price was expected to strengthen to a level where it will trade at a premium to the gold price, the equity market is too optimistic.
“It is factoring in a much stronger recovery than is likely, given the significant above-ground stocks of platinum that have accumulated in recent years,’ they said.
