Platinum Seen Regaining Support After Any Strike-Resolution Decline
Johannesburg (June 3) Platinum prices are likely to dip whenever a four-month-old South African strike comes to an end, but that weakness could be temporary as production may not return to normal for many months.
“If the strike ends, obviously on the day and day after, there will probably be some negative impact on the price,” said Jessica Fung, commodities analyst with BMO. “But I think fundamentally, the market knows it will take a while for the producers to ramp up again.
“And, there is always risk that depending on what the wage settlement is, they (producers) may end up cutting back production as well because it won’t be profitable for them….Profits for them are very marginal at this point. So that’s also a decision they need to make going forward.”
The Association of Mineworkers and Construction Union went on strike against three major South African producers – Anglo American Platinum, Impala Platinum and Lonmin – back on Jan. 23. This put a major crimp in global mine supply, since South Africa alone accounts for some 70% of the world’s platinum mine production.
Prices have benefitted some from the strike, although a number of analysts have said not as much as might have been expected for a four-month supply disruption. They tended to attribute this to the large inventories producers built up ahead of time, while warning that the market would tighten as these stockpiles were depleted.
Most-active July platinum prices ended 2013 at $1,376.70 an ounce, then ran up in anticipation of the labor action. They settled at $1,465 on Jan. 22, the day before the strike began, and have had a series of up-and-down moves since. July platinum looked like it was headed for a breakout on May 22 when it peaked at $1,497.80, the strongest level on a futures spot-continuation chart since September. But since, July platinum fell to $1,434.10 as of 11:35 a.m. EDT Tuesday.
Analysts blamed several factors for the pullback over the last couple of weeks. Gold broke lower from a tight wedge-pattern formation, and when the precious-metals bellwether falls, the entire complex often suffers, said Robin Bhar, metals analyst with Societe Generale. Further, the market began to anticipate the end of the strike, particularly when a new South African mining minister stepped up efforts to keep the two sides talking, he said. Jim Steel, HSBC analyst, blamed Monday’s retreat on a labor court ruling rejecting an application by the AMCU to prevent producers from communicating their offers directly to miners.
Additionally, the South African rand has been weakening, Fung said. This means a higher platinum price in the local currency for South African producers, thus helping their profitability picture and theoretically alleviating worries about them having to cut unprofitable output.
Fung looks for platinum to eventually get back to around $1,475, or above $1,500 if the strike extends into the third quarter. Bhar listed $1,500.
Bhar said the lost platinum production from the strike so far is probably somewhere near 1 million ounces. And if the strike ends, he and others said, the supply bleeding won’t stop immediately – production losses will continue for some time during a gradual ramp-up.
“Even after the strike ends, it could take another three to six months for the operations to ramp back up again,” Fung said. “If we assume that the platinum inventories are relatively depleted, this means that we will have quite a bit of a shortage, perhaps even to the October-November period. So we still think there is potential for platinum prices to improve.”
Other analysts also cited a lengthy timeframe needed for a full ramp-up, as well as electricity issues. Steel pointed out that public utility Eskom indicated it will supply additional power to miners, but below levels required for full mine output.
“This is not much of an issue while the strike is on but may surface to impede the ramp-up when the dispute ends,” he said.