Platinum, Are the Stockpiles Real?

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You could argue platinum producers had almost been too successful in positioning their stock in Europe prior to the strikes that crippled production in South Africa early in 2014.

Global-Precious-Metals_Chart_December-2014_FNL

As Resource Investing News recently observed, South Africa produces roughly 70% of the world’s platinum, so a 5-month strike at operations run by Anglo American Platinum, Impala Platinum and Lonmin PLC in the country caused a significant drop in supply that was expected to have more of an effect on prices than it did.

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Stockpiles helped put a cap on prices despite the labor action, then when the strike was settled their continued presence continued to drive prices lower over the summer, even though the exact level of inventory is unclear. One could draw the conclusion that stocks are at least as high as the newly formed World Platinum Investment Council said in its recently released report that estimated above-ground stocks of 2.56 million ounces for 2015.

If they were significantly lower it would be in producers’ interests to convey that information to the market to support prices. Demand remained robust growing at 4.9% in 2014 thanks in large part to the European auto industry which is heavily dependent on platinum for emissions control on light duty diesel engines, but also from the chemical, glass, and medical applications industries. Lower oil prices may also boost refining activity and hence PGM catalyst demand in 2015.

Analysts at banks or working with producers predictably see a robust demand outlook for 2015 and are predicting that prices could rise from current $1,200/ounce levels to $1,550-1,600/ounce in 2015. They may be right, but we are a little more skeptical. A 5-week strike failed to boost prices as expected. Sanctions on Russia – another bullish development the industry suggests – are thankfully not targeted at the metals industry and, hence, as they stand are unlikely to unduly disadvantage supply from the world’s second-largest producer.

In addition, supply from Zimbabwe, the world’s third-largest provider, is ramping up as its ruling regime manages to induce foreign investment and know-how back into the industry. The report says Zimbabwe is working with Russia to develop its Darwendale Platinum project, slated for an eventual capacity of 600,000 ounces of platinum per year and an annual production target of 250,000 ounces within three years.

Unless falling oil prices prove a bigger fillip to global GDP than expected, this new mine supply will enter a cooling global economy in 2015/16 limiting the upside for prices. Much depends on the true size of those producer and investor stocks squirreled away in European stores; the very fact the true level is so opaque makes us suspect they may be larger than some in the industry believe.

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