London – Platinum prices, undisturbed by the South African mine strike, now in its fifth month, could soon begin to rise as the metal stocks built up by producers in anticipation of the strike finally run low.
While market watchers estimate that the strike – the longest and costliest in South African history – could cost a million ounces of lost output this year, spot platinum remains where it was when the strike broke out in January, at $1 450 an ounce.
The action, by workers at Anglo American Platinum, Impala Platinum, and Lonmin, has taken out 40% of global production of the precious metal, which is.
Analysts have attributed the dormant price to the abundant stocks held by producers, which they were able to drip-feed through to consumers, cushioning them from the strike’s impact.
But that cushion is getting thin.
“We probably have another six to eight weeks to go before producers run really low on material they’ve stockpiled,” said Standard Bank analyst Walter de Wet.
“Lonmin have come out to say that they have some stuff in the pipeline that they are processing, and it seems there is some material at Impala and Anglo, too. Anglo on average probably has the most metal compared to the other two.”
Prices are already showing sensitivity, hitting eight-month highs last week after Impala’s chief executive said last Thursday that the strike could last “much longer”.
Analysts say they could bounce back above $1,500/oz, a level not seen since last September.
That is still only a modest rise – and well short of the peaks seen in 2008 – as demand is tepid and there is still plenty of metal throughout the supply chain.
In 2008 the threat to South African supply of power outages sent the metal to a record $2 290 an ounce, against a backdrop of much more buoyant demand.
“As soon as prices get above $1 500 an ounce, from a risk-return perspective, buying platinum is less attractive in the current environment,” de Wet said. “It will be a real struggle to get to $1 600, though that is possible.”
“When things tighten up, they tend to do so quite fast. We haven’t been at that point just yet, and I think we’ll have to see a substantially longer strike for this market to tighten up on a sustainable basis. There’s obviously excess metal around.”
In addition to producers, some stocks remain in the hands of consumers, he added. The strike was heavily trailed towards the end of last year, giving end-users plenty of time to build up inventories of their own.
“Stocks are held throughout the chain,” Investec analyst Marc Elliott said. “It’s not just the producers, it’s the consumers, the processors.”
“I understand sponge is trading at a small premium to ingot, so ingot is being converted into sponge, suggesting sales of stored-up metal to meet demand. But basically, all parties were able to make sure they have lots of platinum.”
The main consumers of platinum are carmakers – which use the metal as a component in catalytic converters, particularly in the diesel-centric European market – and jewellers, especially in China.
The latter accounts for more than a fifth of all platinum demand, while European autocatalyst demand makes up another 18%. Neither of these demand segments are likely to drive prices much higher, analysts say.
Europe’s car demand has been under pressure since the sovereign debt crisis hit the bloc. Analysts said discounts and government incentives are still propping up car sales in a market expected to show only modest growth this year after six straight years of contraction.
Meanwhile, analysts report that Chinese jewellery demand has become increasingly price sensitive. Imports of platinum into China fell 30% in April, data from the customs office showed.
As talks to find a solution to the strike restarted on Thursday, South Africa’s finance minister said ending the strike, which threatens to push the continent’s most advanced economy into recession, is critical.
Even if it is ended now, it will take time to ramp production back up to the levels seen late last year.
“The realisation is that the strike, and the impact of the strike, isn’t going to suddenly be over,” Macquarie analyst Matthew Turner said.
“Some stocks have been sold, and given the lack of price action I assume those are stocks held close to the supply chain. It also looks as though Chinese imports have been a lot weaker in May, so some of the slack will have been taken off there.”
“But clearly, when we’re probably approaching the best part of a million ounces of lost production by the end of the month, then it will have an impact.”