Long Platinum, Short Palladium For Next 3 Months: Deutsche Bank
Deutsche Bank thinks that the current platinum price level of $1,390/oz is an attractive entry-point to begin accumulating positions in platinum. For those investors who are not comfortable with a pure long position, Duetsche Bank recommends a long platinum / short palladium trade over the next three months.
“Clearly risks to the Eurozone remain and channel checks would suggest that the auto manufacturers are well supplied, but we think an opportunity is emerging. Whilst the demand drivers (and indeed the overall fundamentals) favour palladium over the medium term (emerging market vehicle sales and continued substitution ), the slowing growth in the US and China may weigh on the metal.” The Bank noted in a report.
Supply disruptions in South Africa also have a much more muted impact on palladium supply.
Supply, demand in doldrums
Platinum supply/demand fundamentals are improving with the price finding a level of support at the US$1,380 to US$1,390/oz level. While demand remains in the doldrums (perhaps even softening mildly as Eurozone growth stagnates) the supply situation continues to deteriorate. These supply challenges may be sufficient to potentially push the market into deficit this year.
The current adverse economic conditions for platinum producers in addition to the increased interruptions from violent strikes and protests are resulting in increased production risks for platinum in South Africa.
Inter-union tension seems to be escalating however with a serious outbreak of violence occurring at Lonmin’s Marikana mining complex over the past five days. On Friday, about 3,000 Lonmin rock drill operators (the category of worker being targeted by AMCU to build a support base) began an illegal work stoppage and protest march.
The following violence between rival unions resulted in the deaths of eight Lonmin workers and two policemen. Subsequently, the death tolls have climbed.
Production at Lonmin’s Marikana mine has, unsurprisingly, been severely disrupted. The Western Platinum complex at Marikana (c.75 – 80% of production) continued initially to operate at a reduced capacity, but subsequently all mining operations have been suspended, with only stockpiles being processed.
Risk escalation in South Africa business climate
“We are also cognizant of the political consequences of the escalating worker-related problems within the country. A call for greater government involvement in the mining industry could be made, resulting in a possible increase in perceived political risks for doing business in South Africa and thus further declines in capex (US$820m in curtailments announced so far in 2012) within the industry.”
This at a time when many industry participants are not generating sufficient cash flows to support existing growth plans.
Platinum recycling prospects
An increasingly important component of the platinum supply equation is recycled autocatalysts.
Deutsche Bank’s base case assumption is one of increasing collection and processing efficiencies, combined with higher platinum loadings in the spent autocatalysts being recycled. The increase in secondary or recycled material is the equivalent of at least one medium size mine per annum over the next few years.
However the collection end of the recycling chain is still fragmented with a number of small players which rely on a steady stream of cash to continue operations. The sharp fall in platinum prices in May, combined with the weak Rhodium price (also part of the PGM cocktail in an autocat) will mean that margins are no longer as healthy.
As a result returned metal may fall short of expectations.