/ 21 November 2003

Platinum nears top of cycle

Platinum is riding the crest of a wave in world markets, but its longer-term prospects are less buoyant, a key market analysis suggested this week.

South Africa is expected to supply a record 4,65-million ounces of the world’s 6,11-million ounces produced this year — that’s a whopping 76%.

The Johnson Matthey Interim Platinum Review, released on Tuesday, paints a bright picture of platinum’s immediate prospects.

The London-based precious metals research house predicts that the price of platinum will hit a high of $820/oz in the next six months. The forecast pushed the metal to a 23-year high of $772/oz this week.

The upward pressure on the price stems from the shortage that has plagued the market for the past five years. However, this year the shortfall is expected to narrow to 480 000 ounces. The review says the demand for platinum is expected to reach 6,59-million ounces this year, representing growth of 0,5 % — its slowest in more than 10 years.

Growth is expected to be driven by autocatalyst users in Europe and the United States, which are expected to consume 3,18-million ounces, up by 20% from last year.

This is mainly because of an impressive rise in the number of diesel-driven cars in Europe. At the same time jewellery applications of platinum are expected to fall by 13% to 2,45-million ounces. Johnson Matthey attributes this to lower purchases by Far Eastern buyers.

The review also notes that as an investment vehicle platinum has lost significant ground. This year only 10 000 ounces were expected to be purchased for investment purposes, a sharp fall from 80 000 ounces last year.

The higher price has had the dual effect of tempting Japanese and Chinese bar holders to sell back to the market, while reducing demand for platinum coins in the US mint.

A key problem for South African producers is, unsurprisingly, the rand.

Allan Cooke, a mining analyst at HSBC Securities, estimates that the rand price of the basket of platinum group metals has fallen by 30% since the beginning of the year, from R5 000 to R3 500 an ounce.

This can be attributed both to the strength of the rand and to the weak price of platinum-group metal palladium. South Africa’s geology makes palladium extractable at a ratio of one ounce of the metal for every two ounces of platinum.

However, Cooke worries not so much about the current strength of the rand as its volatility risk, which makes long-term planning difficult.

At worst he believes the strong rand will lead to a deferment of projects, and therefore new job opportunities, rather than destruction of employment in platinum mining.

Also used in catalytic converters for car exhausts, palladium is recovering from a decline brought on by an artificial shortage.

In the late 1990s a breakdown in the Russian administration delayed the issuing of export licences and quotas for exporters. This pushed the price to a high of $1 100 an ounce in early 2001.

Auto manufacturers then stockpiled the metal, and over-supply resulted in a dramatic price collapse to below $144 in April. On Thursday this week, the price stood at $192 an ounce.

This year there is expected to be a world surplus of 670 000 ounces of palladium. The platinum-metal group also comprises rhodium, iridium and ruthenium.

Johnson Matthey said palladium’s recovery would be driven by the lower price, leading to a surge in demand across all major applications.

Electronics manufacturers would take up 31% more of the metal following two years of very weak demand.

This would be followed by car- makers, whose demand would rise by 19%, and dental alloys, which would increase by a modest 6%. Overall demand for palladium would recover by 16% to 5,65-million ounces this year.

South African and world suppliers are led by Anglo Platinum. The giant will come under scrutiny this December when it unveils a review of all its projects in the wake of the strengthening rand.

In the current year it is expected to produce 2,3-million ounces — 100 000 ounces below target. The projection has sent slight jitters through the market.

South Africa’s other major producer, Impala Platinum, is expected to produce 495 000 ounces, representing a 4,4 % fall in production.

Its major headache has been the Crocodile River Mine, which, after experiencing severe technical problems while undertaking structural changes to underground mining, produced a paltry 8 210 ounces in the first half of this year.

A decision on the project’s future is expected next month.

Lonmin, by contrast, is expected to exceed its target of 870 000 ounces in the year ending in September.

Northam, which is owned by Tokyo Sexwale’s Mvelaphanda, recovered from a year marred by strikes to increase its output by 22% to 333 000 ounces.