Precious Metals

The perfect storm has hit platinum in the wake of the Japanese earthquake and geopolitical events in the Middle East and North Africa regions. The impact of these events are specific to the platinum market in one regard: automotive demand. Nearly 40 percent of total platinum demand comes from the auto industry.

By Michael Montgomery—Exclusive to Platinum Investing News

It seems that the perfect storm has hit platinum in the wake of the Japanese earthquake and geopolitical events in the Middle East and North Africa regions, and the recent call for transfer of ownership of foreign mining firms to local blacks in Zimbabwe. The impact of these events are specific to the platinum market in one regard: automotive demand.

Japan, home to the world’s best-selling auto brand, Toyota, has had to shut down facilities in the aftermath of the quake. The tensions in Libya and the Middle East have supported high oil prices, which in turn lowers the forecast for auto sales worldwide.

These two events affect the demand for platinum because of its use in emission reducing catalytic converters, which accounts for nearly 40 percent of total demand. The metal is also used in spark plugs and oxygen sensors. The spot price for the metal fell from $1777.00 per ounce down to $1697.00 just four trading sessions after the quake on March 11th. The spot price for the metal has since rebounded up to $1766.00 per ounce at close today in New York, up $31.00 on the day.

The platinum market may have been hit hard by these events, however, as Japanese automakers resume production, the price of the metal has resumed its general uptrend. Japan accounts for 15 percent of global platinum demand and 16 percent of the PGM sister palladium. Any drop in production or demand for automotive vehicles affects these markets in a big way.

Speculation by hedge funds in palladium and platinum may have been to blame for the large losses in the wake of the earthquake. “Tuesday’s sharper price declines were likely ‘exacerbated’ by large speculative positions in both platinum and palladium . . . We’re seeing a snowball effect that carried metals down very significantly,” stated Philip Klapwijk, executive chairman of metal consultancy GFMS Limited. This is due to these massive hedge funds executing large sell-stops that perform large sale orders to prevent losses.

Going forward, auto sales worldwide are strong, which may account for the rebound in platinum. “[P]urchases in February posting a double-digit gain for the second consecutive month . . . Russia is leading the way, with sales surging 80 per cent year-over-year (y/y) last month, and 77 per cent year-to-date… in the United States soaring 27 per cent above a year earlier to an annualized 13.4 million units – the highest level since the cash-for-clunkers program in August 2009,” according to a the Global Auto Report, by Scotia Economics.

In China, car sales are still forecasted to grow by 10 to15 percent this year, slower that 2010’s extreme 32.4 percent growth rate for a total of over 18 million vehicles. However, a 10 percent growth forecast for 2011 is still robust. A rebound in car sales worldwide will support platinum’s price going forward.

Platinum mining news

Following a growing trend in Africa, Zimbabwean President Robert Mugabe has called on foreign mining firms to sell majority stakes to black citizens in six months. While the nation only produces around 4 percent of global platinum output, the drop in share prices of mining firms in the region accentuates investors’ apprehension about the risks of doing business in the region. A related story about black ownership in South Africa was covered on Manganese Investing News in September, 2010.

“[M]ining companies had 45 days in which to detail how they planned to transfer a majority stake to local black investors. The notice said that if a foreign – or “non-indigenous” – mining company showed “good cause”, the six-month deadline for the transfer of ownership could be extended for a “further period of not more than six months,” reported Alfonce Mbizwo, for Reuters.

President Mugabe has stated that he will not back down from this proposal to make up for colonial injustices and oppression. The news sent shares of companies in the country such as Aquarius Platinum (LON:AQP)(ASX:AQP) and Impala Platinum down nearly 7 percent and 5 percent, respectively, the day after the announcement.

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