Declining stockpiles signal better times for platinum prices

JOHANNESBURG-SOUTH AFRICA (Oct 8 )  PLATINUM prices and, by extension, platinum mining shares are forecast to start picking up as a large inventory works its way out of the system, SBG Securities said.

In its quarterly report on the platinum group metals market, SBG analysts Justin Froneman and Setendra Naidoo argued the price of platinum was behaving in a manner that showed a market with large stockpiles.

The aboveground inventory of platinum was estimated at 1,153 days worth of consumption but a large portion of this was tightly held, leaving an excess of 305 days worth, which would contract at an accelerated rate over the next two years, they said.

"This estimated drawdown period will be further accelerated should South African PGM (platinum group metals) supply be materially impacted by labour outages and stoppages, exceeding our current 5% disruption allowance — approximately 250,000oz per annum — with this process magnified in platinum and rhodium given South Africa’s supply dominance in these metals," the analysts said.

South Africa is the largest supplier of global platinum, generating more than 70% of the world’s metal. South Africa supplies about 35% of the world’s palladium.

SBG expects the prices of platinum, palladium and sister metal rhodium to push up in the next 12 to 18 months, with shares in PGM producers starting to price in this event during that time.

Platinum and palladium are important industrial metals and are used to make autocatalytic converters for motor vehicles to scrub out noxious gases in exhaust systems. Platinum is used largely for diesel engines and palladium in petrol motors.

Platinum is also used for jewellery.

The palladium market is similarly encumbered with large aboveground stocks. SBG estimates there are 1,029 days worth of palladium consumption. Again, a large portion of this is tightly held, leaving more than 488 days worth of consumption.

"Net-net, we expect excess platinum stocks to return to normalised levels over the next two years, while palladium and rhodium are expected to take a similar time to reach this point, albeit on a different trajectory," SBG said.

"A normalisation in these stock positions should see underlying US dollar PGM prices begin to track the PGM fundamentals and industry cost curve more closely, a feature which is noticeably absent from current spot prices."

Derek Engelbrecht, marketing executive at Impala Platinum, said in an interview last week a recovery in the European car markets, a large user of platinum, was some time away, with a possible pick-up in 2015.

"It’s going to be another tough 12 to 18 months for the platinum producers and then we’ll see some better times coming," he said.