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In October of last year, we published a
platinum-market overview in the Casey International Speculator and concluded by saying: "We
recommend avoiding South Africa, and in this context it means staying away
from platinum producers located there. If the energy situation spins out of
control, miners' strikes continue, and the local trouble puts an indefinite halt
to a significant portion of platinum production, some speculative
opportunities may appear in the physical-metal market or platinum-backed
investment tools. If we see signs of that happening, we may speculate on the
results."
Although some of the events that we expected did
occur this year, the "indefinite halt" has not. The nationwide
wildcat strikes that ended in mid-November suggested that that scenario was
possible, but the bubbling pot simmered down. We were asked by our readers to
share our view on the implications of those actions on the price of platinum.
So, what is the outlook for the platinum market now,
and is it time to buy?
State of
the Market
Let's start with some context. According to Johnson
Matthey's Platinum 2012 report, the platinum market in 2011 was in a state
of surplus. Primary supply rose by 7% to a four-year high of 6.5 million
ounces, while total demand grew only 2%. All segments of the platinum market
expanded except investment demand, which declined 30% year-on-year.
Supply from South Africa grew by 5% in 2011, but not
from actual mining. It was "due to releases of metal from in-process and
refined inventories." Mine production fell by 3% because of safety
stoppages and labor disruptions.
Production in South Africa was unstable throughout
2011, and Johnson Matthey forecasted that difficulties would continue in
2012, with an anticipated decrease in total supply. Well, the analysts were
right: through mid-September, BMO Capital Markets estimated that 250,000 fewer ounces were produced, due to the labor disputes we've seen so much about
in the news. The overall impact of the South African labor strikes on the
supply-demand balance, as estimated by Johnson Matthey in its Platinum 2012 Interim Review, will amount to "at least 300,000 oz."
The report predicts that the platinum market will end this year in a state of
deficit, by about 400,000 ounces. Demand is projected to remain steady at
about 8.1 million ounces, whereas global supply will decline.
On the surface, this might sound like a buying
opportunity; but before we jump in, let's take a look at the full demand
picture.
Industrial
Demand
Johnson Matthey expects industrial demand to fall by
13% in 2012. BMO estimates that slow European auto sales have translated into
a loss of 280,000 ounces of platinum demand through mid-September. This by
itself almost offsets the forecasted 300,000-ounce drop in production caused
by labor strife.
The net impact on the supply-demand relationship is,
again, mixed: demand is expected to remain relatively stable. This year's
supply disturbances may not necessarily cause a major, long-term imbalance
due to the influence of the third part of the equation: recycling. In fact,
the report explicitly states that recycling, not the South African supply issues, "will be a key factor in the platinum market
balance in 2013."
Downside
Risk Remains
If you accept the Casey view that global economic
hardship is far from over, the downside risk for platinum is significant.
Platinum and other platinum group metals (PGMs) are industrial commodities,
and trends in their industrial demand can serve as a good indicator of price
movements. So far, we have not seen signs of significant improvement in the
global economy. We here at Casey Research do not believe that further
monetary-easing efforts will cure what ails the US and global economies, so
our bearish outlook for the industrial metals, including PGMs, stands.
This doesn't, however, mean that we won't see
interim spikes in the platinum price, such as the recent one that followed
the deaths of 47 protesting miners in South Africa. Fear gripped the market,
and a short-term rally ensued. Was that reaction justified? Yes, given how
much platinum production comes from South Africa and how bad the situation
there is.
That behavior, though, is driven by panic, not
fundamentals, and was short lived. It is very different from what we see in
the gold market, where fundamentals do support long-term bullishness for an
asset that serves as both money and a hedge against economic uncertainty,
despite short-term, knee-jerk reactions.
In other words, until signs of global economic
growth emerge or we see serious, permanent supply destruction, we view any
movements in the platinum market as fleeting, not fundamental.
What
Does It Mean?
Now that the large, nationwide strikes have ended,
investors are trying to assess their impact on the supply-demand balance.
After all, they were a primary factor driving perception of the platinum
market this year. However, we doubt that the recent strikes will have a deep
and lasting impact on the state of the platinum industry. Whatever lingering
effects there might be will not be more powerful than the ongoing global
economic weakness.
Although the platinum market is now estimated to end
the year in deficit, unless there's a new and even greater supply disruption,
the existing recycling output will likely adapt and fill in the 2012 supply
gap rather quickly, especially if prices move up.
Investors who are more bullish on the economy than
us might want to speculate on platinum now, to benefit from a pop in prices
should the estimates of the global market deficit become reality. If you're
of that mindset, you might consider the new Platinum Trust currently being
offered by our friends at Sprott.
As for us, we plan to stick with our preferred
monetary metals: gold and silver.
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