Byron Kennedy in London
Industry leaders generally don’t like to rock the boat in public at least. That statement rings even more true when it’s a rather close-knit community like the one that gathered in London this week to take in the 17th annual Johnson Matthey platinum review.
More than 250 delegates managed to squeeze a brief presentation and a Hilton lunch into their diaries, although some did admit that they hadn’t seen the presentation earlier in the morning and were, as one analyst said, “just here for the free beer”.
On-the-record conversations tended to muster frivolous soundbites like “the industry is on the right path” or “full steam ahead”. Relegate your notebook to closed status, throw in a few glasses of wine and all of a sudden it’s a different ball game. With all the niceties out of the way, then, what are some of the key problems that face platinum group metal producers?
One delegate, picking up on my Johannesburg accent, stated quite boldly that South African miners face not quite a management crisis but rather a “problem”. He pointed to the fact that, from a supply perspective, South Africa had failed to deliver its share of the expected quota last year and brushed aside apologies in the form of flooding and strike action as merely poor excuses.
Management had, in his opinion, failed to increase production rapidly enough to meet demand in an environment where the price of both platinum and palladium had reached phenomenal heights.
When pressed to substantiate his case, Impala Platinum’s inability to replace former CEO Steve Kearney was tabled rather promptly. Certainly a valid point, since Kearney’s position was vacated in the middle of last year.
One anecdotal comment doesn’t constitute any kind of trend, but considering this individual’s track record and the fact that he’s on the “buy-side”, it suggests that perhaps there are some cracks starting to emerge in an industry where everything seems overly rosy.
Yes, the Russian government’s inability to make lasting decisions over whether they should deplete their precious-metal stockpiles will ensure that instability is one of the few certainties. It has resulted in the degree of volatility experienced last year and has seen Johnson Matthey’s six-month forecasts for the metals take on curious proportions. It says palladium will trade between $550 and $750 an ounce, while they anticipate that platinum will float between $550 and $625. Both metals are currently trading almost exactly in the middle of those ranges so, in effect, they’re not taking a stance on whether prices will trend up or down in the months ahead.
What factors are likely to mould the prospects of platinum group metals (PGMs)? According to its 50-page document, entitled Platinum 2001, Johnson Matthey expects that the deficit that existed in platinum supply last year will be narrowed due to increased production primarily by Johannesburg Stock Exchange-listed Anglo Platinum. They’ve budgeted for 4-million ounces out of South Africa during the current year, but it doesn’t come as a surprise to note that there’s no guesstimate on possible Russian supply. Over the past five years the Russians have been erratic in their contribution to the platinum market.
Last year Russia exported 1,1-million ounces, which doubled its 1999 volume but was somewhat short compared with levels in 1998. Once again, the report notes, Russia has dragged its heels in approving export quotas as well as the issuing of relevant licences to do so. It has been indicated, though, that Norilsk Nickel, as well as Far East alluvial producers, has been granted one-year quotas, according to the report.
Platinum demand is again expected to be tapped mostly by jewellery, although rising prices forced consumers to cut back on purchases. Last year’s weakness in Japan resulted in a decline in demand from the jewellery sector the first in 16 years. It also saw China emerge as the world’s largest platinum jewellery destination, with 39%, against Japan’s 37% and North America’s 13%.
In the past year increased demand for motor vehicles in the United States and Europe resulted in a greater need for platinum and especially palladium, key components of environment-friendly autocatalysts. This consumption is now pegged at 52% of combined platinum and palladium production, but could expect to retreat from those levels as the world’s largest economy, the US, moves into slowdown mode.
Johnson Matthey is also encouraged by the increased industrial usage of platinum in the composition of computer hardware like hard disk drives, as well as the LCD displays crucial to cellphone technology.
While demand for platinum grew marginally last year to 5,6-million ounces (from 5,59-million in 1999), high prices saw palladium needs reduced to 8,9-million ounces, compared with 9,37-million ounces in 1999. Dentists and car makers sought alternatives, although the metal’s application in electronic capacitors did help offset the decline.
Russia, though, provides two-thirds of the world’s palladium hence the reluctance by Johnson Matthey to narrow the spread at which it expects the metal to trade for the next six months. A price comparable to platinum’s would encourage increased usage by its biggest consumer, the auto industry, but its fate is clearly in incompetent hands.
The Russian government’s policy is too “difficult to predict” says Platinum 2001, although the “substantial gap between consumption and fresh consumption that has existed for the past five years … is likely to close. However, the market still needs extra supplies from Russian government stocks and remains highly susceptible to changes in Russian sales policy.”
While it’s hardly likely that they would shoot themselves in the head by flooding the market with palladium, chances are that an undecided Russian government could well artificially squeeze the metal price higher by reducing the volume it exports. It’s that kind of “good news” that’s already factored into the stock prices of the world’s leading PGM producers, which in itself presents increased risk from a pure valuation perspective.
While the debate whether there’s still value in PGM stocks is one for another day, I’ll leave you with the words of an asset manager at one of South Africa’s foremost value investing houses: “The future for platinum miners appears extremely lucrative at this moment in time, while their gold cousins are faced with doom and gloom. That tells me it’s time to get out of platinum and into gold.”
ENDS