Are platinum supply concerns overblown? | FT Alphaville

Are platinum supply concerns overblown?

The scenes at Lonmin’s mine in South Africa and reports that labour unrest has spread to two other mines have helped push up platinum prices to three-and-a-half month highs with the focus very much on supply issues.

But what if the market is actually still suffering from too much supply, even with the latest disruptions? According to the precious metals team at Credit Suisse on Wednesday, that may indeed the case:

On a forward looking basis the market on our analysis looks oversupplied by c 250-350koz in 2013/14.

Over at UBS, Edel Tully estimates that the disputes will drag on for around three weeks and reduce this year’s production by some 70koz. But, she added:

“This still would not clear out the 210,000 ounces expected surplus we estimate for the year.”

Demand for the metal comes mainly from car production (specifically, catalytic converters) and jewellery, but it hasn’t been keeping up with supply over the past couple of years. Prices slumped in mid-2008 and have been struggling to recover ever since:

Chart via Kitco)

The market is forecast by Credit Suisse to remain over-supplied in the next couple of years.

Looking just at car production in Europe (which the CS team calls “the key demand variable”) even if it increases by four per cent in the next two years (their most optimistic case), there’ll still be a 200koz and 117koz supply excess:

Their bear case scenario is a five per cent drop in volumes next year and a two per cent increase in 2014, which would see platinum surpluses of 349koz in 2013 and 312koz in 2014. But if Europe heads for a 2009-scale recession (not unlikely given the latest growth figures) the fall would be much sharper:

An even worse case scenario however could see auto production down 8% vs 2012 levels. Our analysis of the European car industry shows that should Europe generally driftinto a 2009’esque crisis situation there is further 8% downside. This analysis takes into account several factors including scrappage scheme impact last time around, and the fact that while inventories look overstocked currently they remain well below the levels heading into 09.

With jewellery, demand is expected to stay pretty steady, but they add:

The brand-image of platinum is one of a luxury, aspirational jewelleryproduct – it seems possible, if not probable, that the scenes reported from South Africa willhave at least a temporary effect on the appeal of platinum to certain sectors of the market.

The team is pessimistic that producers will have the discipline to limit supply. A prolonged period of flat production is needed, but unlikely to be achieved (barring escalating public order disruptions, of course):

Platinum producers need to keep production flat over the next two years to bring the market back into balance … Our view remains unchanged that production is unlikely to be cut meaningfully, but even a tangible plan on keeping production flat could be seen as relativity bullish for the sector.

Given that there are just four main platinum producers globally, it’s relatively easy to keep track of their production plans. The main concern is for Anglo American Platinum (emphasis ours):

Lonmin have been forced to cut capex due to balance sheet constraints, and will likely remain at a c750koz production level over the next 2 years. AQP have put two mines on care and maintenance and production should be slightly down assuming a ramp up of Kroondal in CY2013 vs. 2012. But with Impala ramping up the lease area, it will be up to Amplats to moderate production to keep the aggregate balance in check.

Anglo American Platinum is the biggest potential delta in the platinum supply and demand balance. Prior to their interim results, the market has assumed (but perhaps not actually believed) that company was targeting 2.5moz of production in 2012, and c100koz additional ounces per annum thereafter. Growth from Mogalakwena open pit would have supported these assumptions as would have proposed ramp-up of Western Limb operations. However, with the demand environment weak the company stated that they would look to adapt production to market conditions. Therefore the Amplats review will shed more light on how the company will keep production flat, despite growth at Mogalakwena over the medium term.

The Amplats strategic review is due in the fourth quarter.

But there are signs that some producers are responding to the weak demand, with the Impala Platinum warning on Wednesday that its Zimbabwe unit may delay a $460m expansion project, due for completion in 2015, if platinum prices remain subdued this year.

Related links:
South African mining unrest spreads – FT
The cold-hearted market in Lonmin stock – FT Alphaville
South Africa mine battles put floor under shaky platinum price – Reuters