Platinum Strike Widens Output Deficit Seen Lasting Years

A labor dispute that all but shut platinum mines in South Africa since January is extending the longest shortfall in global production since 2005, which Morgan Stanley predicts will take at least four years to fix.

For a third straight year, makers of auto parts and jewelry will use more of the metal than is mined. Credit Suisse Group AG on March 31 raised its deficit forecast for this year by 25 percent to 836,000 ounces, after concluding the strike in South Africa, the world’s top producer, will prevent more than 1 million ounces from being retrieved in 2014.

Workers who normally earn 5,000 rand ($474) a month have gotten nothing since the walkout began, forcing some to sell belongings as union leaders renew demands for higher pay. Mine owners including Lonmin Plc say they are losing $15 million a day and may buy metal to meet supply commitments. Hedge funds more than doubled their bets on higher prices this year, and holdings in exchange-traded funds backed by platinum are up 68 percent from a year ago.

“It’s a challenging situation,” said John Stephenson, who helps oversee about C$3.1 billion ($2.8 billion) at First Asset Investment Management Inc. in Toronto. “I see platinum becoming very, very precious.”

Futures will average $1,639 an ounce this year, or 14 percent more than yesterday’s close of $1,437.80 on the New York Mercantile Exchange, Morgan Stanley predicted in an April 8 report. The bank said the production deficit will last at least until 2018, fueled by rising demand for the metal in catalytic converters, which reduce auto emissions.

Output Drop

The strike reduced output of platinum-group metals, including palladium, rhodium, iridium and ruthenium mined from the same ore, by 36 percent in February, the most in two years, the Pretoria-based Statistics South Africa, said April 10. The nation supplies more than 70 percent of world platinum output.

Hedge funds and other large speculators are holding a net-long position of 31,730 platinum futures as of April 8, after increasing bets in six of the past eight weeks, U.S. Commodity Futures Trading Commission data show. Wagers jumped to a one-year high in March. ETPs backed by the metal surged to a record 82.4526 metric tons (2.9 million ounces) yesterday valued at $3.8 billion.

Platinum futures are up 4.9 percent this year in New York, trailing the 8.1 percent advance in gold. Palladium gained 12 percent as the strike reduced output from South Africa, the second-largest supplier, and tensions escalated between Ukraine and Russia, the biggest producer. The U.S. and European Union are discussing more sanctions against Russia.

Refusing Offers

The strike by more than 70,000 South African workers will continue as long as companies refuse to improve wage offers, Joseph Mathunjwa, president of the Association of Mineworkers and Construction Union, said April 15. The union is the biggest labor representative at mines owned by top producers Lonmin, Anglo American Platinum Ltd. and Impala Platinum Holdings Ltd.

The workers want basic monthly pay boosted to 12,500 rand over four years, which the producers say they can’t afford after production costs jumped 18 percent annually in the last five years, as wage and electricity costs rose. Many laborers live in shacks made of iron sheeting. They share toilets, don’t always have water or power, and many spend much of their income servicing debt. The country has a 24 percent unemployment rate.

“The union may have to distribute food as workers have not been paid for so long,” said Sydwell Dokolwana, the National Union of Mineworkers’ regional secretary in Rustenburg. “There’s a huge problem here, and it is very, very bad.”

In Rustenburg, a city of 500,000 about 60 miles west of Pretoria, mining-related industries account for about half the jobs and 60 percent of the economy, according to Thapelo Matebesi, the spokesman for the local municipality.

High Inventory

“With jewelry demand making up a relatively large portion of platinum demand, should platinum rally too much, too quickly, jewelry demand could fall away,” Standard Bank Group Ltd. said in a report on April 14, referring to China, which accounts for 70 percent of world platinum jewelry. “This would in turn cap the sustainability of higher platinum prices in the short run.”

Futures are down about 1.7 percent since the strike began, partly as the appeal of haven assets including gold faded. Supplies of recycled platinum will rise 3.7 percent this year to 1.36 million ounces, according to CPM Group.

“Clearly people are not convinced that Europe has come out of the woods,” after a recession in 2012, said David Christensen, who oversees $300 million of assets as chief executive officer of ASA Gold and Precious Metals Ltd., a San Mateo, California-based company investing in precious-metal companies. “Also, supplies have not yet hit a precarious condition for people to start betting on higher prices.”

Hurting Demand

The International Monetary Fund said this month that the world economy will expand 3.6 percent this year, less than the 3.7 percent expected in January. The euro-area’s monetary authority needs to use unconventional measures to help sustain growth, the IMF said April 8.

Disruptions at South Africa’s platinum mines risk damaging long-term demand by pushing industrial users to use alternative metals, including palladium, industry researcher Johnson Matthey Plc, which makes one-third of the world’s catalytic converters, said on Jan. 29.

Palladium jumped to $817 an ounce on April 14, the highest since 2011, on speculation that demand from automobile makers in U.S. and China, the world’s largest auto markets, may rise amid supply concerns. Like platinum, palladium is used for catalytic converters in vehicles.

Switching Catalysts

“Platinum consumption has been stagnating, while palladium consumption has been growing and the catalysts increasingly use palladium instead of platinum,” Anton Berlin, marketing director at Norilsk Nickel unit ZAO NormetImpex, said on a April 7 conference call.

Palladium usage by the automobile industry will rise 4.2 percent to 7.13 million ounces this year, while demand for platinum from carmakers will increase 2 percent this year to 3.13 million ounces, according to Credit Suisse.

While platinum prices are down from a peak of $2,308.80 in 2008, demand is improving as output drops. Morgan Stanley predicts a 4 percent growth in EU auto sales in 2014. Europe accounts for 25 percent of all platinum use, with the continent’s car companies the biggest source of demand behind Chinese jewelers, according to Johnson Matthey.

Jewelry Demand

Platinum jewelry demand may rise 1.3 percent to 2.8 million ounces and industrial needs for the metal will gain 3.8 percent to 1.9 million ounces this year, Barclays Plc predicts. The bank in a March 26 report said it sees “more upside” in the near term.

Bayerische Motoren Werke, Audi and Mercedes posted their highest monthly deliveries ever in March on surging demand in China and the U.S., the world’s two largest auto markets.

Supplies from South Africa continue to drop, and the longer it lasts, the more time it will take to get mines back into full production.

“The extended period of closure is very detrimental for the mines so the supply situation could worsen further,” said Tom Kendall, an analyst at Credit Suisse in London who was the most-accurate forecaster of platinum prices in the past eight quarters, according to data compiled by Bloomberg. “The impact will be large enough to be felt on prices.”

Anglo American Platinum, the top producer, said in January that every day it loses about 4,000 platinum ounces of production and about 100 million rand of revenue. The mines of the Johannesburg-based company where the workers are striking accounted for 46 percent of its output in 2013.

‘Last Resort’

Lonmin Chief Executive Officer Ben Magara said earlier this month it would buy metal on the open market “as a last resort.” The company runs operations from Johannesburg. Impala, the second-biggest producer, said it is losing 2,800 ounces a day after work was halted at the Rustenburg Lease mines, which accounted for 58 percent of mined output.

“We are getting to the stage where we will not be able to meet the normal requirements of our customers,” Johan Theron, a spokesman for Impala, said yesterday from Johannesburg. “We have been supplementing deliveries from the inventory, but soon that may not be possible if the strike continues.”

Talks between platinum companies and the union remained inconclusive, Charmane Russell, a spokeswoman for the producers at Russell & Associates, said today by telephone. The discussion will continue next week, she said.

Amplats has risen 28 percent this year in Johannesburg, touching a two-year high on April 14 of 530 rand. Johannesburg-based Impala slid 0.8 percent, while Lonmin has dropped 3.7 percent.

“Anytime there is a curtailment in supplies we will see prices gradually move higher,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “The question in everybody’s mind is how long will this strike last.”

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