Palladium pulls back, but no meltdown for platinum

David McKay

Inside mining

Anglo Platinum, the world’s largest platinum group metal (pgm) producer, expects the pgm market to remain stable despite significant increases in production.

Anglo Platinum, for one, is building yearly production to 3,5-million ounces by 2005, a growth in that company’s output of about three-quarters.

The increasing use of pgm in autocatalysis and the prospect of platinum in fuel cells partly underpin the producer’s confidence.

Anglo Platinum is not alone in its bullishness for the pgm market, but it does come amid a correction in the palladium price. Palladium has slipped off its $1?000-an-ounce-plus pedestal over the past two weeks to trade below $800 an ounce. This not unexpected correction follows reports of significant exports of Russian palladium expected to hit the market this month.

Anglo Platinum’s executive commercial director Dorian Emmett says there are several compelling reasons to expect a stable pgm market. The shift from platinum to palladium and back again in autocatalysis is proving a high-growth yet sustainable market for pgm producers.

“This is always likely because of the unique qualities of platinum,” he says. Fuel cells are another obvious growth point. Emmett likes to quote Bill Ford, chair of the Ford Motor Company, who has said fuel cells would finally end the 100-year reign of the internal combustion engine. The role of platinum jewellery, however, is more vulnerable than other areas of pgm demand because as with diamonds sales depend upon discretionary consumer spending. And as we all know, consumers are fickle: budgets react sharply to fresh economic conditions. It’s for this reason that platinum jewellery is aggressively marketed by the Platinum Guild International (PGI).

The PGI has initiated a drive for platinum jewellery sales in India, traditionally a gold-focused jewellery market. PGI chief executive James Courage says there is little evidence of expertise in working platinum jewellery in India; nonetheless the guild is looking for “steady growth from a solid foundation”, perhaps replicating the growth seen in China.

Emmett says the jewellery market for platinum is globalising and is no longer dependent on Japanese demand as it was during the 1980s. The reason is the extraordinary growth of the Chinese market.

Fabrication of jewellery in China is estimated to have reached 1,1-million ounces in 2000 from less than 200?000 ounces in 1996. As a result Chinese demand now matches that of Japan. However, the platinum jewellery market has not had it all its own way.

Courage says increases in platinum prices appear not to have dented demand in China but have led to a more volatile market in the short-term. Chinese manufacturers have tended to dip into the market during the troughs while exiting them during the peaks.

In the United States, platinum jewellery sales over Christmas were disappointing.

“Sales were below expectations in the US, increasing between 2% and 3% compared to 20% growth last year,” he says. As a result, the PGI has identified the bridal market as a key growth area in the US where there are about two million marriages a year. Courage says four out of 10 married couples choose platinum.

“That’s a 40% acquisition rate compared to a mere one per cent 10 years ago.” The PGI is also pushing the pendant in a “going for the heart” campaign a move that should boost flagging platinum chain sales. “We’re in the business of selling love,” says Courage.

South African platinum counters have readjusted lately with Impala Platinum and Anglo Platinum losing ground. Impala Platinum has shed 6% in the past 10 days and Anglo Platinum fell 5,6%but has since settled back to around R360 a share.

Other counters, Northam Platinum and Lonmin widely treated as a platinum company despite its coal and gold holdings have also retraced gains recorded earlier this year. Northam has done particularly well. In total, the Johannesburg Stock Exchange’s platinum index has lost 1,2% since about the middle of February.

Yet top-rated analysts Rene Hochreiter of Barnard Jacobs Mellet and Greg Hunter of Deutsche Bank maintain target prices of R600 to R700 a share are possible for Anglo Platinum and Impala Platinum.

Their confidence is based on the solid pgm market.

“You could easily reach these valuations even with palladium falling back, particularly if the rand stays at current levels or weakens even further (against the dollar),” says Hunter.

While a pull-back in platinum shares may continue for a little longer, the expectation is that a meltdown is not in the offing.

Increasingly, however, platinum counters will be judged by their ability to mobilise cash and keep operations on an even keel at a time when bonanza revenues can distract or lure management into complacency.

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