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Platinum nearing its value territory

Created:
20 November 2008
Written by:
Daniel O'Sullivan

This time last year, shares in South African platinum miner Lonmin gained on disappointing full-year results, because a bullish update to Johnson Matthey's authoritative platinum survey was released the same day. Despite the same timing coincidence this year, there was no repeat bounce for Lonmin - or any of London's other platinum miners

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This time, the Matthey survey is in some respects more bullish than expected, calling for a full-year 2008 deficit between annual new platinum supply and total annual demand of 240,000 ounces (oz), a result of demand falling 2.3 per cent to 6.52 million oz but supply falling faster - by 4.2 per cent to 6.28m oz. The shortfall is considerably less than industry expectations earlier this year of a deficit close to the half-million oz mark, but still spells the largest draw on platinum stocks since 2003.

Because autocatalyst production is the largest market for platinum, falling car sales have been seen as a key factor in the precipitate decline in the platinum price from its all-time high in March of $2,276 per oz to around $840 per oz now. Yet, Matthey finds that a steep drop in US auto sector consumption has actually been more than offset by surprisingly strong European auto sector demand - perhaps representing manufacturers building stocks at what they recognise is a bargain basement price for the white metal.

Matthey fingers dumping of platinum by the investment sector as the prime cause of the price plunge, and makes the unfolding financial crisis the key variable in the wide range it hazards for platinum prices in the next six months, of $700-$1,400 per oz. The latter price is around what many see as roughly justified by fundamentals in terms of marginal cost of required supply in the medium term. Yet, this is of little comfort to platinum producers in the real world, facing prices stuck obstinately below this supposed support level, and with Matthey's downside scenario looking all too plausible - platinum has already traded as low as $744 per oz.

So, the sector is hunkering down, cutting back production at unprofitable mines and mothballing expansion plans conceived when prices were more buoyant. Thus Lonmin's Limpopo mine - previously vaunted as the flagship of its full mechanisation strategy - now faces closure (see Lonmin results for more). Aquarius Platinum is also cutting production at its more marginal operations that look unprofitable.

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We warned that platinum was set to lose its lustre back in May, when the price was $2,200 per oz, and have been negative on both Aquarius and Lonmin for a some time, too. Production cutbacks now will restrict future supply, though, so platinum is definitely a commodity worth watching in the long run.

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