Platinum Glut Diminishing as Bear Market Approaches: Commodities

The first drop in platinum mine supply in four years and record car sales, the biggest source of demand, are reducing a surplus of the metal and shoring up prices on the brink of a bear market.

Output will drop 4 percent to 6.14 million ounces this year as labor strikes and safety concerns disrupt mining in South Africa, the biggest producer, Barclays Plc estimates. That will diminish the annual glut by 90 percent to 37,000 ounces, the bank predicts. Prices will average $1,750 an ounce in the fourth quarter, 22 percent more than now, the median of 13 analyst estimates compiled by Bloomberg shows.

The metal, used to make autocatalysts and jewelry, slid 16 percent in the past three months and hedge funds are now their least bullish since at least 2009 on speculation that slower global economic growth will curb demand. Prices are now within about 1 percentage point of average production costs, which continue to rise as companies dig as deep as 1.3 miles to find ore and face surging wage and energy bills.

“Platinum is very, very cheap at the moment,” said Thorsten Proettel, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany and the third-most accurate forecaster of platinum prices in Bloomberg Rankings in the two years through December. “It’s more the supply side which could help the platinum price accelerate because supply is very tight.”

Bear Market

The metal’s 18 percent plunge to $1,430.75 since late February leaves it within 2 percentage points of the common definition of a bear market. The slump pared this year’s gain to 2.1 percent, still beating the performance of gold, silver and palladium. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 4.2 percent since the start of January and the MSCI All-Country World Index of equities rose 1.4 percent. Treasuries returned 1.2 percent, a Bank of America Corp. index (MXWD) shows.

It costs an average $1,437 to extract an ounce of platinum, according to Proettel. The slide in prices is eroding earnings, discouraging the development of new mines or expansions. Impala Platinum Holdings Ltd. (IMP), the second-biggest producer, will report a 21 percent drop in net income in 2012 while London-based Lonmin Plc, the third largest, will make 76 percent less profit in its fiscal year ending in September, analysts estimates compiled by Bloomberg show.

Hedge funds and other large speculators cut wagers on a rally by 70 percent to 6,200 U.S. futures and options in the three months through May 22, according to Commodity Futures Trading Commission data. Holdings in exchange-traded products backed by the metal dropped 11 percent to 41.1 metric tons valued at $1.9 billion since September, data compiled by Bloomberg show.

Electrical Goods

Rebounding prices may encourage more recycling, compensating for the decline in mine output. Scrap supply from autocatalysts, electrical goods and jewelry reached a record 2.05 million ounces last year, from 565,000 ounces in 2002, according to Johnson Matthey Plc, the maker of about one in three of all autocatalysts. Prices averaged an all-time high of $1,721 last year, compared with $541 in 2002.

The surge is encouraging carmakers to use more palladium in autocatalysts, canisters that have honeycomb-like surfaces and convert emissions into less harmful substances. Platinum’s sister metal is trading at $604.50 an ounce. Palladium accounted for about 30 percent of the metal loaded into catalytic converters for diesel-power vehicles last year, up from 20 percent in 2009, London-based Johnson Matthey estimates.

Largest Car Market

Demand for platinum, which Barclays anticipates will grow 1 percent to 7.99 million ounces this year, may fall short of expectations as economic growth weakens. China, the world’s largest car market, expanded 8.1 percent in the first quarter, the slowest pace in almost three years. About $4.2 trillion was erased from the value of global equities since April on concern that Greece will exit the 17-nation euro zone.

Global sales of cars and light commercial vehicles are poised to rise 5.5 percent to a record 79.4 million units this year, according to LMC Automotive Ltd., a research company in Oxford, England. Carmakers account for 38 percent of platinum consumption, Johnson Matthey estimates.

Prices may also rebound as supply becomes more constricted. Mining companies are contending with strikes by workers demanding higher wages. South African inflation rose to 6.1 percent in April, up from 3.5 percent at the end of 2010, government data show. Workers at Johannesburg-based Impala’s Rustenburg mine in South Africa, the world’s biggest, started a month-long strike over a pay dispute in January that cut more than 120,000 ounces of output. The company said May 24 that the latest labor unrest at the site cost 6,000 ounces.

Miners Killed

Work has also been suspended after 123 mining deaths and 2,918 injuries in South Africa last year, Mineral Resources Minister Susan Shabangu told reporters March 20. The platinum industry lost about 300,000 ounces of production last year because of safety stoppages, London-based Anglo American Plc said Feb. 17.

Mine disruptions in the first quarter drove platinum prices 17 percent higher, the best performance in three years. While most of that was erased in the subsequent slump, the metal’s gain since the start of January compares with a 2.3 percent advance in silver, 0.8 percent increase in gold and a 7.9 percent drop in palladium.

Energy Prices

Lonmin extracted 4.4 grams of platinum-group metals from every ton of ore last year, 5.4 percent less than in 2010, according to the company’s annual report. Production costs rose 11 percent because of wages, energy prices, safety stoppages and strikes.

The company will report net income of $66.4 million in the 12 months through Sept. 30, compared with $273 million a year earlier, the mean of nine estimates shows. Impala will make 5.25 billion rand ($630 billion), compared with 6.64 billion rand in 2011, according to the mean of seven estimates.

That contrasts with Anglo American Platinum Ltd., the biggest producer, which is expected to post earnings of 4.35 billion rand this year, from 3.59 billion rand in 2010, the mean of six estimates shows. Shares of the Johannesburg-based company fell 10 percent this year, compared with a 17 percent drop for Impala and 24 percent retreat for Lonmin.

Shafts now extend down as much as 2,115 meters (6,940 feet) and temperatures at the rock face of Northam Platinum Ltd.’s Zondereinde mine in South Africa can reach as high as 162 degrees Fahrenheit (72 degrees Celsius). It uses as many as seven refrigeration units to pump chilled air into the mine, according to data on the company’s website.

“For many producers the price is insufficiently high to sustain the industry,” said Bart Melek, the head of commodity strategy at TD Securities Inc. in Toronto. “Given the fact that we’re going to see some decent demand growth over the next several years, we’re going to have to see expansion.”

To contact the reporters for this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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