Platinum deficit: much higher than feared (Source: Miningmx)

Brendan Ryan
Posted: Thu, 24 Jan 2008

[miningmx.com] -- THE platinum market plunged back into deficit during 2007 because of supply problems from various South African mines, and another deficit is likely this year.

That’s the view of Impala Platinum marketing executive Derek Engelbrecht, interviewed after announcements of further production shortfalls at Anglo Platinum, Lonmin and Northam Platinum.

Latest market developments bear out his comments made mid-2007 that the risk to the platinum price was to the upside because of question marks over the ability of the SA producers to meet their supply forecasts.

Engelbrecht commented: “Consensus view last year was that the market would show a surplus of around 200,000 oz. Instead, that has turned into a deficit of about 300,000 oz and it looks like it is going to be a similar story for 2008.”

The latest setbacks to production include the forecast loss of between 50,000 oz and 70,000 oz from Anglo Platinum’s Amandelbult mine which has been flooded and is currently running at about 25% of capacity. Estimates are it will take three to four months to get back to full production.

Lonmin - the world’s third-largest producer of platinum - has just dropped its forecast production for the financial year to end-September 2008 to around 860,000 oz following a 19% drop in refined platinum output for the quarter to end-December.

In November, Lonmin CEO Brad Mills estimated financial 2008 production at 900,000 oz which was far short of the earlier estimates of 1.1 million ounces that Lonmin was supposed to produce.

Mills added a caveat to his latest, reduced forecast. He commented: “Any further safety stoppages or any significant escalation of current power supply interruptions are risks to this target.”

Power supply issues are beyond Lonmin’s control but the other issues are ones that management is supposed to be able to influence. Those include safety, poor labour relations and underperformance on Lonmin’s mechanised mining plans.

Adding to the platinum sector’s overall poor performance is Northam Platinum, which today weighed in with a warning that its profits for the six months to end-December would be between 25% and 32% lower. Reasons given were “lower production following unplanned safety-related stoppages and an increase in inventory.”

By comparison, Aquarius Platinum outperformed in the three months to December, reporting a drop of “only 2%” in quarter-on-quarter production to 137,457oz because of “safety, industrial relations and power shortage shutdowns.”

According to Aquarius “pgm (platinum group metals) basket prices reached record levels during the quarter in US$ terms. At our South African operations the four element basket price broke R11,000/oz, averaging 5% higher than the previous quarter at R11,173/oz, equal to $1 648/oz.”

Engelbrecht expects the platinum price to move higher but that’s not something he is particularly happy about given the likely negative impacts on jewellery demand, which is suffering at these price levels. He’s also concerned about the extra incentive this will give car manufacturers to step up their efforts to replace expensive platinum with cheaper palladium in autocatalyst, which utilises pgm to clean up engine exhaust emissions.

The platinum price today pushed back to levels around $1,560/oz. This compares with the all-time high of $1,590/oz hit about two weeks ago after which platinum dropped back to just above $1,500/oz.

Engelbrecht commented: “Chinese jewellery demand has held up incredibly well under these conditions. The Chinese jumped in and bought 360kg of platinum on the one day that the metal traded in a range of $1,507 to $1,515.”

He added that the size of the platinum ETF (exchange traded fund) was also becoming a factor in the market. “The total amount of platinum in the ETF sat around 20 000oz for most of last year. It took off in the November/December period and now sits around 200,000/oz. Effectively, what we are losing in jewellery demand is being made up by the demand from the ETF.”

The overall supply situation was worrying because it was likely to lead to greater impetus to substitute palladium for platinum in the all-important diesel-engine sector, Engelbrecht commented. The one positive factor was that it seemed demand for diesel-engine cars was growing so rapidly that it would probably compensate for such a substitution effect in terms of total rising demand for platinum.

“If I was a foreign consumer of platinum I would be wondering what the hell is going on in South Africa with the mine safety issue, the power problems and now the heavy rain hitting production,” Engelbrecht said.