By Michelle Smith–Exclusive to Platinum Investing News
The British Geological Survey (BGS) has a risk list outlining the relative threat to supply of chemical elements and element groups that are needed to maintain the global economy. A visualization of the list is available through this infographic. Of the 52 items, platinum group elements are among the four with an 8.5 out of 10 rating on the index, which marks them as very high at risk.
A disruption of platinum supply could have widespread adverse effects. In addition to its number one role in emission systems, the metal is used in electronics, such as hard disk drives and LCD monitors. It is used to make explosives, fertilizers and anti-cancer drugs. Platinum is also used for oil refining.
Using the four equally weighted criteria discussed below, the BGS concluded that the metal is part of a group that faces very high supply risks.
Though it is often grouped with other precious metals, platinum is the rarest. With a crustal abundance of only .0015 parts per million, the BGS recognizes scarcity as a strong risk factor.
When production of a commodity is concentrated in a few countries, the BGS says supply risk may increase. Using their World Mineral Production data, the agency assessed the top three producing countries and the percentage of world supply from the top supplier.
That data, ranging from 2005-09, shows that South Africa accounted for 80 percent of the global platinum production. Russia provided 11 percent and another 4 percent came from Zimbabwe.
That South Africa produces the bulk of the world’s platinum is reasonably a cause for concern. The data reports a 4 percent decline in production in 2009, noting the industry was hard hit by issues such as safety stoppages, strike action, and geological issues.
In 2012, the nation’s platinum mining industry continues to face these problems and they are becoming more challenging. Production is getting more expensive and requiring deeper digging. Labor disputes and safety stoppages are becoming greater forces to be reckoned with and the pressures are taking a notable toll on the industry.
Aquarius Platinum (LSE:AQP,ASX:AQP,JSE:AQP) says it will review the Everest mine because strikes and safety stoppages have curbed output. The company plans to limit production for the 12 to 18 months of review. Anglo American Platinum (LSE:AAL,ADR:AAUKY) reported its production slipped over the last year by a fifth due to stoppages. And, Zimplats (ASX:ZIM) recently announced that strikes at its Rustenberg unit were costing 3,000 ounces per day.
The BGS data showed a slight production increase in Russia in 2009, but reported Canada’s production as falling 41 percent in 2009.
Reserve base distribution
The BGS also thought it important to assess where elements may be produced in the future. For this, they used US Geological Survey data, which revealed that of the world’s 80,000,000 kg platinum reserve base, 70,000,000 kg lie in South Africa. Russia and the US ranked second and third respectively.
It should be remembered that this list assesses possibility, but there is also reality. The Johnson Matthey 2011 Platinum Interim Review forecast a 6 percent supply increase, with noted contributions from North America and Zimbabwe. South Africa is not expected to be a significant contributor and Russian production is expected to be flat.
For this final criteria, the BGS used political stability rankings from the World Bank, again focusing on the top three producers. These measure the perception of likelihood that a producing nation’s government will be destabilized or overthrown in an unconstitutional or violent manner.
South Africa ranked 44.3, Russia ranked 18, and Canada ranked 81.
According to the World Bank, these rankings indicate the percentage of countries worldwide that rate lower. This would suggest that relative to most countries Canada is politically stable, but Russia is not.
A supporting explanation was not provided for the rankings, but it was noted that a functioning democracy could receive a low ranking since issues such as terrorism or political violence can still arise.
High supply risks do not change the fact that for the foreseeable future the world is largely dependent on South Africa for platinum. Demand was not a consideration when compiling the BGS risk list, but it is one that certainly shouldn’t be overlooked by investors and miners.
Governments, industry, and consumers have been warned not to take platinum for granted or to become over-reliant on it. But, it is integrated into society in a way that makes it difficult to change habits surrounding its use.
With the emissions standards in many nations, platinum use is essentially required by law. Until people trend toward different forms of transportation or new pollution technology is developed, the metal’s use cannot be eliminated. Substitution is also highly improbable for many other applications where platinum is used.
Given the on-going demand, the obstacles to significant production increases in South Africa, and the minimal contribution to supply from other sources, miners should be carefully assessing the potentially rewarding opportunities associated with this rare metal. The BGS supply risk list is a reminder that the need for secure and diverse platinum supply is well recognized.
Securities Disclosure: I, Michelle Smith, do not hold any equity interests in the companies mentioned in this article.