Platinum's price spike won’t last
Aug 28, 2012
Until last week, platinum traders had been so focused on weak demand for the metal that they had virtually forgotten about the supply picture, says Geoff Candy on Mineweb.co.za. But they’ve now received a stark reminder.
Clashes between striking miners and police have led to more than 30 deaths at South Africa’s Marikana platinum mine belonging to Lonmin, the world’s third biggest producer of the metal. The incident marks the bloodiest security crackdown since apartheid. Tension between competing mining unions has also led to fatalities.
Lonmin, which accounts for around 12% of annual global supply, has lost over a week of production, and there is now talk of it needing a rights issue to alleviate the consequent squeeze on its finances. Its shares have fallen by almost a fifth since the disputes began. Meanwhile, the price of platinum has bounced from a recent two-and-a-half-year low of $1,400 an ounce to $1,500.
The affair highlights a long-term problem, says Commerzbank’s Eugen Weinberg: the “exploding” costs facing platinum producers in South Africa, which accounts for 75% of global mine production. The protesting miners wanted further wage hikes barely a year after agreeing on an 8.5% rise in 2012 and 2013. With platinum prices low, producers need to reduce output and lay off workers to shore up their businesses, says the FT. But that’s “all but impossible in the current climate”. Government prevarication over possible nationalisation is another worry for the sector.
So what does this mean for platinum prices? Miners will find it hard to cut output, even though they are still producing too much “for an auto market that is in its weakest condition in decades”, says Citigroup’s Jon Bergtheil.
Platinum is used for catalytic converters in diesel engines, which are common in China and Europe. The latter’s shrinking economy is the key issue on the demand side. European consumers’ appetite for platinum jewellery has also been subdued. Meanwhile, the relatively small jump in prices merely highlights the size of the surplus of platinum in the market, says Ann-Laure Tremblay of BNP Paribas. The price uptick is unlikely to persist. “Most of the gains,” says Edward Meir of INTL FCStone, “are behind us.”