Platinum Moves into Second Half Weak, and Weakening

Platinum Q1

The risk appetite in Q1 was accompanied by ample consideration of potential supply constraints.

Platinum kicked off the year at $1,415. News of potential power shortages, disappointing production results in the previous quarter, and a strike underway at Impala Platinum (LSE:IPLA,OTC Pink:IMPUY) provided support for gains. Platinum hit a 10-week high and ended January up $230.

The Impala labor situation ballooned from about 5,000 striking workers to the dismissal of over 17,000 workers. In February, with supply concerns priced in, platinum reached a five-month high of $1,728.

The metal came under notable pressure in March, which began with a sell-off. The labor issues at Impala were resolved, and although an estimated 120,000 ounces were reported to be lost, platinum prices continued declining. The metal found pockets of fleeting support. For example, as would be seen on a number of occasions during H1, price weakness prompted some physical buying in Asia, which in turn gave prices a quick boost. At one point platinum even temporarily regained its premium over gold.

Though prices fell $84 in March, Q1 ended with net inflows of $200 million into platinum ETFs and futures markets, indicating that investors were optimistic about the metal over the quarter.

Platinum Q2

Investors became increasingly risk averse in Q2 and platinum began touching new lows. In April, prices fell below $1,600 for the first time since January. There was slight support from news that 21,000 ounces were lost during a three-week strike at the Modikwa mine. However, continued lack of  commitment to further easing by the Federal Reserve hammered gold prices, which dragged platinum down. The metal fell to a three-month low of $1,550.

In May, platinum prices fell below $1,500. Very much in focus for many market participants was the risk that low prices were contributing to unprofitable conditions for some South African platinum mines. Eastern Platinum (TSX:ELR,LSE:ELR,OTC Pink:ELRFF) suspended development of its Mareesburg project.

But as investors were in the middle of de-risking, they were largely unfazed by supply concerns. There was a sharp sell-off in NYMEX and TOCOM futures markets. Net-long positions fell below 1 million, a level not seen since 2009. Investors liquidated about 43,000 ounces, or 3 percent, of the platinum held in ETFs.

June opened with platinum prices under severe pressure, having fallen below the $1,400 level. There was volatility in the market, with prices bouncing up and down. But even the news that Aquarius Platinum (ASX:AQP,LSE:AQP,OTC Pink:AQPTY) would shutter two mines couldn’t provide ample support for sustained upward momentum.

Of the precious metals, platinum was the only one to see net outflows from ETFs in Q2, according to data from the recently released Global Commodity ETP Quarterly for Q2 2012. The losses amounted to some $80 million.

Platinum in H2

Moving into H2, the Eurozone crisis continues to keep platinum under pressure. Europe is certainly important for platinum as it accounted for over 37 percent of the metal’s consumption for autocatalysts in 2011. Auto sales in the region have slumped with the deepening of the economic crisis.

The recession in Europe in Q4 2011 and H1 2012 is expected to lower autocatalyst demand by 2 percent this year, according to CPM Group’s Platinum Group Metals Yearbook 2012. The publication says that the Japanese vehicle market, which began recovering at double digit rates in October, is expected to boost platinum auto demand by 20 percent.

Nick Brooks, head of research and investment strategy at ETF Securities, confirmed that investors are trading the metal more on the outlook for industrial use than on supply concerns.

But investors may want to begin closely assessing whether the slowdown in Europe will outweigh risky supply conditions in South Africa. If so, it is also important to consider how long that situation will be a drag on prices.

Contrary to investor perceptions, the PGM Yearbook says platinum fabrication demand is projected to rise 3.5 percent in 2012, the strongest growth since 2006. In addition to expectations for growth in auto demand, CPM Group notes that jewelry accounts for about a quarter of fabrication demand and says that sector is highly price sensitive.

There is virtually no new supply capacity being added, and some sources of last year’s growth aren’t expected this year. For example, Johnson Matthey attributes a portion of 2011 supply to metal shaken out of the pipeline, a tactic that is expected to be largely unfeasible in 2012.

An estimated 150,000 ounces of PGM production has already been lost solely from illegal strikes, a supply risk that lingers. Factor in safety stoppages, operational losses, and mine closures and the supply picture takes on a new look.

Aggravating matters in South Africa are rapidly escalating production costs.

During a Business News Network appearance, Edward Sterck, vice president of precious metals and mining at BMO Capital, said production costs have been rising at about 25 percent per year since 2007, and there isn’t any sign of that abating unless the rand begins to weaken.

Platinum prices are currently below $1,400, which will place further pressure on production as miners are likely to find these prices unmotivating and in some cases unsustainable. Some market participants are expecting platinum to bottom and be forced into a correction.

All of South Africa’s platinum miners have “fairly material problems at the moment,” said Sterck. “It’s difficult to make a strong investment case at the moment. But it is a sector worth watching  because at some point we will see supply and demand balance out.”

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.