Platinum’s Fate May Be Determined In Zimbabwe

By Michelle Smith—Exclusive to Platinum Investing News

The effects of Japan’s earthquake are certainly relevant to the platinum market, but adequate attention should also be given to developments in Zimbabwe. Reports that mining companies will be required to relinquish the majority of their stakes to indigenous nationals are raising concerns and could have a major impact on the market.

Zimbabwe’s President, Robert Mugabe, signed the Indigenization and Economic Empowerment bill in 2008. This law, if implemented, would require platinum mines to transfer 51 percent ownership to Zimbabweans. Last month, Reuters reported that Zimbabwe is creating a sovereign wealth fund for this purpose.

Bart Melek, head commodity strategist for TD Securities, warns that ownership rights are “critical in order for capital to flow into development.” If the situation in Zimbabwe takes a turn for the worse, platinum supply could be in trouble.

A changing tide

Platinum was set to shine in 2011 with auto sales in China and India expected to drive demand. Then, Japan’s earthquake occurred, shaking the auto market, which in turn shook the platinum market.

Platinum, classified as a precious metal, is also an industrial metal. It is one that auto makers heavily rely upon for parts such as catalytic converters and spark plugs. Following Japan’s natural disaster, auto production has been reduced in some cases and has come to a full halt in others. This led to a sharp decline in platinum’s value last month, from a high of $1,850 per ounce to a day low of $1,654 on March 17.

News that Zimbabwe’s mining firms were given 45 days to submit plans to comply with the indigenization law served another blow to platinum. Zimbabwe’s Prime Minister, Morgan Tsvangirai, attempted to calm investors by dismissing claims about impending nationalization as untrue. But, companies with exposure to the country’s platinum industry still experienced a sinking of their stock prices. These included Impala (PINK:IMPUY), Aquarius (ASX:AQP; LON:AQP) and Lonmin (LON:LMI).

Prior to the Zimbabwe news, Johnson Matthey issued a report expressing optimism that the country’s platinum production would increase this year. Companies currently operating in Zimbabwe had plans to expand and the potential to access the world’s second largest platinum reserves appeared to be luring new interests.

Melek says that “nationalism can totally squeeze out private capital and often causes production declines and resource degradation.” Furthermore, “a hard form of resource nationalism can include partial or total confiscations of producing facilities.”

More cause for concern

South Africa holds the world’s largest platinum reserves and is the leading producer, responsible for about three-quarters of the global supply. Still, Zimbabwe’s 4.5 percent contribution cannot be overlooked. As a Heraeus report succinctly puts it, the amount of platinum produced each year could easily fit into a garage. And, that is not enough to meet current demands.

Melek already predicted a platinum deficit by 2013. “Even a small reduction in new capacity in Zimbabwe can bring this market into a deficit much earlier than planned,” he says.

There are further worries about the inspiration that South Africa’s African National Congress Youth Leader, Julius Malema, may draw from Zimbabwe. Malema has previously expressed desires to nationalize South Africa’s mines, referring to mining companies as “daylight robbers.” If that conversation resurfaces there could be even greater adverse effects.

At this point, platinum is shrouded with uncertainty. Auto production has not fully resumed and Melek discourages nonchalance about the events in Zimbabwe.

Platinum deficits will likely result in a quick spike in prices. Some investors apparently see the profit potential. Frankfurt-based Heraeus Holdings noted that some investors are taking advantage of platinum’s current market correction and buying into the metal at cheaper prices.