As gold fell from US$1,560/oz down to the mid $1,300’s, platinum fell from $1,530/oz to ~$1,400 over the course of the same two trading days. From a technical perspective, platinum’s decline was not as dramatic as gold’s, as it did not breach any notable technical levels to the downside. Platinum has held a strong support just under $1,400/oz since the beginning of 2012 and, in the trading days that followed the price decline, platinum rebounded strongly back above $1,400/oz almost immediately after breaching it.
In the weeks that have followed, the underlying platinum markets have reminded us why we liked the metal so much to begin with. Despite the price correction, the story remains the same: terrible supply side fundamentals coming from the main production base in South Africa, coupled with a stable demand for platinum’s catalytic utility in global auto production (with the exception of Europe, which remains weak). Despite the price change, nothing has dramatically changed on either side of the equation, and new developments on the supply side suggest platinum may be capable of rallying back to previous levels sooner than many expect.
Morgan Stanley recently published a note highlighting the potential for electricity shortages in South Africa, where energy infrastructure has suffered from almost two decades of under-investment. According to the note, current electrical capacity in South Africa is 2,000 MW below average winter demand. So far, the deficit is expected to be covered by 940 MW of capacity projected to come back online in May, coupled with cuts in planned maintenance to existing plants that could add another 2,000 MW. But as Morgan Stanley points out, if anything goes wrong, the current imbalance could remain elevated for the next 18 months.1
Electricity is a vital component in platinum mining, as most mines require constant water drainage using elaborate pumping systems. Without electricity, most of the mines cannot maintain production at all. We saw this in 2008, when South Africa suffered from rolling electrical blackouts that caused the platinum spot price to rally by almost 30% in the first three months of the year. Although Morgan Stanley cautions against applying a direct comparison today, they do estimate that platinum will achieve an average price of $1,621 for 2013 and $1,785 for 2014 – making it their preferred metal investment.
Given South Africa’s recent track record of achieving production targets, we believe there is a strong chance electricity could once again become a serious problem for the country’s platinum producers this year. In addition, while gold ETF’s have reduced their collective holdings by 13% from the beginning of this year, platinum and palladium ETFs have ADDED 11% and 13%, respectively, showing a clear preference for these metals among investors.
We wouldn’t go that far ourselves, but the recent correction certainly appears to be an opportunity for those who understand the underlying fundamentals of PGMs (platinum group metals). 2013 still looks like it could be a great year for both platinum and palladium as the supply situation deteriorates further.Courtesy: Sprott Group