Platinum Supply Falls to 13-Year Low as Mines Close
Comment of the Day

February 05 2013

Commentary by David Fuller

Platinum Supply Falls to 13-Year Low as Mines Close

This is an informative report from Bloomberg, and not one-sided. Here is the opening
Platinum supplies are falling to a 13-year low as mines in South Africa, the world's biggest producer, close and automobile sales reach new highs.

Production will drop 2.7 percent to 5.68 million ounces, the least since 2000, according to Barclays Plc, which raised its 2013 shortage estimate sixfold last month after Johannesburg-based Anglo American Platinum Ltd. (AMS) said it plans to idle shafts. At the same time, demand from carmakers, the biggest consumer of the metal, will increase 0.5 percent in 2013, Barclays says. Investors are buying platinum at the fastest pace in three years.

Prices already rose about 10 percent this year, following the same advance for all of 2012, and will average $1,770 an ounce in the fourth quarter, the highest since 2011, according to the median of 15 analyst estimates compiled by Bloomberg. Costs for carmakers will increase because about 53 percent of all metal mined ends up in catalytic converters.

"Supplies are very tight and it's a serious situation," said Mihir Worah, who manages $110 billion in real return strategy funds at Pacific Investment Management Co., in Newport Beach,California. "Not only are there issues on the supply side, we could see surprises on the demand side as well."

And a comment on demand side uncertainties:

"The problems have not disappeared as global growth is uncertain and China is still somewhat cloudy and Europe is slowing," said Walter "Bucky" Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. "It would be difficult to say where the increase in demand will come from unless we see an upsurge in growth. There are supply issues but we need demand to drive prices."

Fewer jewelry purchases and cooling investment this year mean demand will drop 4.6 percent to the lowest since 2009, Barclays estimates.

A contraction in Europe poses a risk to consumption because the region is the biggest market for platinum in catalytic converters, according to London-based Johnson Matthey. Platinum is used with palladium and rhodium in the canisters with honeycomb-like surfaces that convert emissions into less harmful substances.

David Fuller's view Known supplies of platinum (historic & weekly) are dwindling, and this continues to be reflected by the general underperformance of mining companies which produce it. One hopes that South Africa will resolve its wage disputes, preferably in the interests of all parties. However, this may not be possible if the challenges of producing platinum from ever deeper mine shafts and rising underground temperatures make current wage demands uneconomic.

My guess is that the majority of deep shaft mining jobs will eventually be replaced by machinery, not least for the safety of the people involved. However, the technology to do this - economically - presumably has yet to be fully developed. Moreover, even if it was available today, empowerment policies in countries with high unemployment would oppose mechanisation, as we have seen elsewhere.

Regarding 'demand side uncertainties' mentioned in the article above, I believe these will be resolved more quickly than platinum's overall supply problems. Additionally, production difficulties for a scarce precious metal, which is also extremely useful, attractive and desirable, will eventually and inevitably attract renewed demand from both investors and speculators.

Palladium (historic & weekly) appears to be in a similar position of supply difficulty, although less is known, or trusted, regarding the state of Russia's miners. Meanwhile, if you read on in today's opening article above, you will see that "Global car sales exceeded 81 million for the first time ever in 2012 and will advance about 2.5 percent to 83 million this year", according to LMC Automotive Ltd. Production problems and increased industrial demand are the reasons why platinum and palladium are currently outperforming gold and silver. However, within closely allied sectors such as precious metals, leadership is more of a rotating than constant characteristic over the medium to longer term.

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