Source: Brian Sylvester of The Metals Report (6/25/13)
http://www.theaureport.com/pub/na/15399
Violent South African mining labor strikes shocked the globe in 2012, but the resulting negotiations underway could create more stable supply flows in the long term—that’s how CPM Commodity Analyst Erica Rannestad sees it. In this interview with The Metals Report, Rannestad discusses the key developments that could signal a price rise and which producers could clean up big on high-priced PGMs.
The Metals Report: Erica, the platinum group metals (PGM) sector created a lot of buzz at the beginning of this year. What can investors expect in the coming 12 months?
Erica Rannestad: There’s going to be a lot of development in labor and wage negotiation structures in South Africa. It could potentially improve labor conditions in the platinum mining sector, which would provide more certainty about supply flows.
The PGM markets are highly concentrated, meaning that both supply and demand are heavily reliant on only a few sources. On the supply side, about 75% of platinum mine supply comes from South Africa.
These metals are primarily industrial commodities and their prices move in tandem with industrial activity, mostly in the auto sector. At present, there is weakness in platinum prices because demand from the European auto sector is weak and contracting. During the next 12–18 months, growth could improve in the European auto market, which would be positive for platinum prices.
TMR: Could the downturn in automobile purchases in Europe be offset by growing automobile purchases in China and the rest of Asia?
ER: Not necessarily, because platinum is mostly used in diesel automobiles and the auto markets in China and most Asian countries are predominantly gasoline powered. While commercial vehicles are sold throughout the world, most are powered by diesel and the market only accounts for a minority of total global vehicle sales. Even though there is improved growth in the Chinese auto market, it’s not filtering into platinum prices so much as palladium prices because the Chinese auto market is much more reliant on palladium.
TMR: In 2012, some intense labor conflicts in South Africa lead to the Association of Mineworkers and Construction Union (AMCU) to become the majority union at Lonmin Plc (LMI:LSE), Impala Platinum Holdings Ltd. (IMP:JSE) and Anglo American Platinum Ltd.’s (AMS:JSE) Rustenburg complex. What does this mean for the industry at large?
ER: Lonmin and the AMCU are struggling to form an agreement about revisions to the wage negotiation process. There’s still a lot of uncertainty right now, and high risk of additional strikes over the upcoming months. But there’s potential for a reduction in uncertainty about labor-related disruptions to supply in the long term.
TMR: Will the Lonmin deal set the precedent for other companies?
ER: Not necessarily. Last year, Lonmin agreed to a maximum 22% increase in wages. The market thought it was going to set a precedent, but that didn’t necessarily happen. The Chamber of Mines, the Department of Mineral Resources and platinum mining companies are working together in a collaborative way to try and resolve labor issues.
TMR: How much platinum and palladium has Lonmin been responsible for annually?
ER: It has the capacity to produce about 1.5 million ounces (1.5 Moz) of platinum, palladium and rhodium, which is about 9% of global mining capacity of PGMs.
TMR: That could be a significant shortfall if negotiations don’t go well. When is the earliest we could expect an agreement?
ER: It’s been turned over to arbitration. The Commission for Conciliation, Mediation and Arbitration has scheduled the arbitration for June 26. Therefore, I think there could be a decision in the next month or so.
TMR: The other difficulty often associated with South Africa is the threat of nationalization. Those whispers were more ubiquitous a year ago. What are you hearing now?
ER: Our view is that nationalization of the mining industry in South Africa will not occur. That conversation is always coming into the market and it’s always being shut down.
TMR: Let’s get to some hard numbers.
ER: Overall, we do expect an improvement in both supply and demand for all the PGMs. For platinum, last year there was a nearly 11% reduction in supply. This year, we expect about a 4% increase to 7.3 Moz. Last year, fabrication demand was flat from 2011 levels. Most of that was driven by a sharp reduction in European auto demand, which was offset by an increase in jewelry demand. This year, we expect about a 0.9% increase in fabrication demand to 7.4 Moz. That will mostly be driven by a much smaller reduction in European auto demand coupled with continued growth in jewelry demand.
Palladium supply contracted by 5.5% last year to 8.6 Moz, which was slower than the reduction in platinum because the palladium market is less dependent on South African supply. This year, we expect about a 6% palladium production increase to 9.1 Moz. Much of that is the return of supply from South Africa, but also growth in Zimbabwe.
Palladium demand last year grew 8.5% to 5.5 Moz. This year, we expect about a 6.4% increase to 5.8 Moz. The reduction in fabrication demand growth isn’t necessarily a negative thing. Less demand one year could manifest as pent-up demand in the following year. That was the case with Japan last year, following the 2011 natural disasters in the country that disrupted economic and industrial activity. That pent-up demand is largely behind the market now and we expect more normalized growth.
Total supply of rhodium declined 8% last year and we expect it to rise 5% this year to 933,000 ounces (933 Koz). Fabrication demand rose last year by 4.4% to 931 Koz. A lot of that growth was a return in demand from Japan last year. This year, we expect a 1.5% increase in fabrication demand to 945 Koz.
TMR: Where is investment demand trending for platinum and palladium?
ER: Last year, there were a lot of investors selling in the market. The reasons varied. Some investors who had invested years ago saw that the price had doubled and were offloading inventories. Investors in PGMs do best when they have a long-term horizon because these markets are very cyclical and highly concentrated, with very strong and price-positive long-term supply/demand fundamentals. Other investors sold because of cyclical weakness in these markets—contracting demand in Europe and slowing growth in China.
This year, we’re seeing some renewed, although hesitant, interest in PGMs. The new South African physical platinum exchange-traded fund (ETF) that was launched, NewPlat ETF by Absa Investments, has garnered a lot of interest from the South African community. Prior to the launch, institutional investors were only able to invest in the platinum market through mining equities, and equities have not performed very well for several years.
TMR: Right now, prices are at $1,475 for platinum, $750 for palladium and $1,175 for rhodium. What are your projected averages for those three through the end of the year?
ER: We expect platinum will average $1,555 for the year, which is almost flat from 2012. However, we expect a pickup in the Q4/13. We’re much more positive on palladium. We expect about a 13% increase in the annual average price to $730. The average rhodium price could experience a 12% decline to $1,120/oz.
TMR: You’re forecasting modest growth in demand in 2013. Why?
ER: The price weakness during the past two years has been cyclical. It’s also been a function of reduced overall investor interest in precious metals since they touched their peaks in 2011. We do believe that the prices will pick up. Investors need to watch for changes in demand prospects. If the European auto market does significantly improve, it’s going to be positive for platinum demand and prices. The long-term factors that drive the PGM markets are still very positive for the price. Investors that are still in the market with long-term objectives likely have not changed their views about the PGM markets, because many of those price-positive factors remain intact.
TMR: Can you explain the dynamics of PGM’s fabrication demand?
ER: We get this question a lot because these metals are reliant on very cyclical industries. Is there potential for PGMs to be substituted out of an auto catalyst? The answer right now is no. You can use platinum and palladium interchangeably in auto catalysts in gasoline vehicles—less so in diesel vehicles—but these metals are the most efficient, reliable and cheapest answer to reducing harmful emissions. There’s no other metal or technology that is able to perform those functions at those costs. It doesn’t look like PGMs are going to be thrifted out of the auto industry any time soon. Other applications that use PGMs, like the glass and petrochemical industries, don’t have much substitution potential either.
TMR: About a decade ago, Ford Motor Co. and others began stockpiling PGMs to guard against price increases. Could larger manufacturers using PGMs begin to stockpile again?
ER: The industry is much more sophisticated now and understands these markets better than they used to. The market is a little bit more transparent and we have a better idea of where the metal is. There’s also larger secondary supply than there was a decade ago, which has helped to diversity supply sources for fabricators. Of course stockpiling could happen again, but I doubt it would to that magnitude.
TMR: Are there any PGM mines slated to begin production this year?
ER: There are three mines or mine expansions that should start producing metal this year. The Booysendal project, which is owned by Northam Platinum Ltd. (NHM:JSE), is expected to begin producing metal in H2/13. The project could produce about 160 Koz PGMs annually. Northam already has one mine in South Africa, the Zondereinde Mine, which is the deepest, level mine in the country.
The Serra Pelada mine in Brazil, which is owned by Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX), will produce some PGMs from its asset. It’s primarily a gold mine.
TMR: Platinum and palladium are produced as byproducts at a lot of mines, including First Quantum Minerals Ltd.’s (FM:TSX; FQM:LSE) Kevitsa project in Finland.
ER: Then there is Zimplats in Zimbabwe, which is expanding its Ngezi mine with an additional 174 Koz.
TMR: Are there any other PGM projects on the drawing board?
ER: Xstrata Plc (XTA:LSE) has a project in Tanzania, called Kabanga, with a resource of about 1 Moz of PGMs slated for 2015.
Royal Nickel Corp.’s (RNX:TSX) Dumont nickel project in Canada could create 19 Koz of PGMs per year as a byproduct of nickel production. There are 1.5 Moz platinum and palladium Measured and Indicated resources. Only 19 Koz PGMs would be produced per annum, based on the latest reports.
In the U.S., the NorthMet project in Minnesota is being developed by Polymet Mining Corp. (POM:TSX; PLM:NYSE.MKT).
The largest project slated to come on-stream in the near term is the Platinum Group Metals Ltd. (PTM:TSX; PLG:NYSE.MKT) WBJV 1 project in South Africa. It’s a primary platinum project with 275 Koz of annual output.
TMR: That’s a low-cost producer as well.
ER: It’s a near-surface mine, not nearly as deep as most operations in the area. This feature helps reduce the cost, offsetting the fact that the deposit is relatively lower grade.
TMR: There is a slight uptick in cash costs globally, too.
ER: C1 cash costs rose globally by 10% last year and 14% in South Africa. We don’t see any end in sight for cost increases in the medium term. We forecast annual increases of around 10% in the next few years. Labor costs in South Africa have increased at a double-digit pace for the past 30 years. We don’t expect that to change.
TMR: Will price increases outpace cash cost increases, or are they in lockstep with each other?
ER: That hasn’t been the case. We’ve seen prices decline and costs increase, which has deteriorated profit margins. The moment we see a cyclical turnaround in demand growth—again focusing mostly on the European auto market—there could be stronger price increases, which would help alleviate some of that margin pressure on profits.
TMR: How are the institutional investors playing the platinum space?
ER: Investors have been exiting the market over the past 18 months because they reached their long-term price objectives, or shorting the market because of short-term demand weakness. Investors mostly look at the PGMs as an industrial metal and treat it as a cyclical investment. The futures market has expanded in the PGM space remarkably during the past several years. It’s a much different market than it used to be.
Another thing to point out in the futures market is the gross short positions of non-commercials, which are at multi-year highs. Non-commercials are the market participants like money managers and traders, rather than commercial market participants who use the futures market for hedging purposes.
Even though there has been tremendous growth in long positions over the past several years, since H2/12, gross short positions increased to near-record levels. There’s a huge increase in market participation, but also a lot of bearish signs with regards to the growth in short positions. That’s indicative of the entire precious metals complex. All the precious metals are experiencing multiyear highs in gross short positions of non-commercials. We could see some turnaround in the latter half of this year or next year that could be pretty significant.
TMR: Given the strong industrial demand factors then, do you see more offtake agreements coming in this space?
ER: I think what we are seeing is some more interesting financial structures going on in the precious metals industry overall. We’re seeing a lot more metal streaming agreements, for instance.
TMR: Any parting thoughts?
ER: Last year was a turning point in South African supply. It has filtered into decisions on labor issues in the country and the overall industry. Going forward, we are going to see a lot of development at the government, company management and labor union levels in how wages are negotiated and how unions approach labor disputes, which could be a long-term positive for the certainty of supply flow.
The strikes in 2012 were not new to the PGM market. The heightened level of violence certainly was new. That triggered what we are beginning to see as a long-term improvement in labor structure in the country. Investors should watch to see if that provides more certainty. There could be some long-term shifts in certainty and supply flow.
CPM Group actually just released its Platinum Group Metals Yearbook 2013, which includes final 2012 statistics for platinum, palladium and rhodium supply and demand as well as projections for the rest of 2013. In this edition, we’ve included disaggregated PGM secondary supply statistics for the first time, and those are broken down by spent auto catalyst, old jewelry and end-of-life electronics recycling. It’s a great, in-depth resource for investors interested in PGMs.
Erica Rannestad is a commodity analyst at CPM Group. Rannestad covers the precious metals and agricultural softs markets as well as currency markets. She is responsible for building CPM Group’s supply and demand statistics for the precious metals Yearbooks and Long-Term Outlook reports. Rannestad is currently most closely monitoring the silver and platinum markets, providing near- and medium-term price forecasts for these metals in CPM Group’s Precious Metals Advisory, a monthly publication. Rannestad also often contributes to and supports CPM Group consulting projects and regularly presents CPM Group’s market views at conferences and seminars around the world. Rannestad holds a Bachelor of Science degree in finance from Fordham University’s Gabelli School of Business.
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