There are real supply concerns for Platinum Group Metals or PGMs as laborers
continue to protest for higher pay in South Africa. Laborers may demand a
large pay increase while the South African producers are unable to stay profitable.
There is increasing speculation that PGMs could soar higher.
Investors could use this pullback in the metals to add to platinum (PPLT)
and palladium (PALL) at the price levels it was before the violent labor protests
which killed over 44 miners. South African labor issues combined with increasing
auto demand from emerging economies could lead to a supply shortfall and a
major price increase in platinum and palladium.
Some large producers such as Anglo American may close some mines. Platinum
and palladium are extremely undervalued as most miners can't be profitable
at current price levels. South African companies are struggling to survive
with high cost production and rising labor costs. Investors should look at
advanced undeveloped projects in mining friendly jurisdictions.
For several months, I
have written to my readers that platinum and palladium may outperform
gold and silver. Now
other big investors are catching onto this theme first brought to you
right here.
Over the past year, palladium is the only metal that has gained ground in
an uptrend and platinum has held 52 week lows while gold (GLD), silver (SLV),
and copper (JJC) have hit new lows. The reason behind this outperformance
in Platinum Group Metals (PGM) during a weak metal market should be addressed.
Platinum and palladium have recently outperformed gold and silver after underperforming
relative to gold since the credit crisis as the auto industry collapsed and
was bailed out by Washington. Weak demand and volatility in the auto sector
caused the industrial side of the PGM market to be in surplus.
However, since that time automobile manufacturers have rebounded significantly.
General Motors (GM) and Ford (F) are hitting new highs. Record low interest
rates are boosting consumption. Demand for automobiles especially from emerging
nations such as China are surpassing that of the United States. These countries
dealing with significant air pollution need platinum and palladium for catalytic
converters to decrease noxious emissions.
At the same time, labor disputes are putting constraints on supply from South
Africa. Platinum and palladium is unprofitable to mine there as the country
has some of the deepest, dangerous and high cost mines in the world. Russia
becomes the next big player for PGMs and their stockpiles have been rapidly
dwindling.
With the increase in demand for platinum and palladium worldwide and the constraints
on supply from South Africa and Russia, I expect to see these metals continue
to significantly outperform as they did before the credit crisis in 2008.
This pullback in the metals complex may give an opportunity for investors
to diversify into platinum and palladium, which have both a practical use
as a monetary hedge against inflation and as a critical industrial component
for clean automobiles. In addition to automobiles, PGMs are used in cell phones,
jewelry and computers.
Supply for Platinum group metals may be at an all time low, while increasing
demand for clean automobiles may support a price move higher. Investors and
consumers will need addition platinum and palladium projects in stable mining
jurisdictions. Recycling may not be able to fill the supply gap alone.
In addition, attention should be paid to the rare earths (REMX) which may
also see the end of the recent two year downtrend. Rare earths are used not
only in wind turbines, smartphones, iPads and guided missiles, but they are
increasingly used in automobiles to improve fuel efficiency. Newer more fuel
efficient cars use almost double the amount than older gas guzzlers.
The rare earth etf (REMX) has made a significant breakout above the 50 day
moving average on record volume. The two biggest rare earth miners are up
close to 30% in the month of May.
Lynas received good news that the National Front coalition was voted to assume
power in Malaysia where their separation facility is located. Lynas has been
dealing with a vocal opposition but the election was a major support for the
facility which is the largest separation plant outside China.
Molycorp the owner of Mountain Pass, the largest rare earth deposit outside
of China, is making a powerful breakout above the 50 day moving average. This
is the largest high volume gain since it went public back in the summer of
2010. The company showed sales are increasing and demand is picking up. This
may prove to be a turning point for the sector.
Remember China controls the rare earth sector and at anytime could disrupt
the supply of these metals. The Chinese cut off exports back in 2010. This
led to a major stockpiling and speculative buying from end users. Many of
the industrial end users may be running out of those rare earth metals especially
as global demand for fuel efficient vehicles has been increasing significantly.
They may now look to secure supply from advanced heavy rare earth miners.
In conclusion, the global recovery is picking up as Central Banks around the
world promote negative interest rate policies. These record low interest rates
are spurring demand for newer, cleaner and more fuel efficient vehicles. Platinum,
Palladium and rare earth demand should increase significantly on this rebound
in demand as supply remains critically tight from South Africa, Russia and
China.
Disclosure: Author does not own any securities mentioned in article.