It’s a simple case of supply-and-demand economics – and, as always, the smart guys on Wall Street had it all figured out.
Or did they?
Following the resolution of a five-month strike by platinum miners in South Africa – which accounted for one-million-ounces worth of lost production – you’d expect the price to drop, as activity resumed.
But in a deviation from conventional wisdom, platinum prices have actually risen by about $100 – to $1,500 per ounce. That’s the highest level in a year.
What’s going on here?
As it turns out, there are other factors in play…
The primary reason for the increase in platinum prices is that, despite the end of the strike, the labor situation is still volatile, and there are still serious supply risks. For example…
Labor Strife: Just after the platinum miners went back to work, the National Union of Metalworkers of South Africa went on strike.
Producers Are Bailing: All told, the big three platinum producers – Anglo American Platinum (AGPPY), Impala Platinum (IMPUY), and Lonmin plc (LNMIY) have lost $2.3 billion from the strike. So it’s, perhaps, not surprising that some major platinum companies are ceasing production altogether. Indeed, the world’s largest one, Anglo American Platinum, said it will sell its mines in South Africa that were hurt by the strike. This is part of the company’s $4-billion drive to sell underperforming assets.
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Although other South African companies, such as Sibanye Gold (SBGL), are likely buyers, big questions still remain. For example, what about the restructuring and mechanization of the mines, which will inevitably lead to job losses and further union protests?
And even if labor peace holds, a deficit of roughly 200,000 to 250,000 ounces of platinum is expected throughout the remainder of 2014.
To exacerbate the platinum supply problems, demand is strongly increasing, mainly from the auto industry. Indeed, it accounts for a hefty 38% of global platinum demand.
You can see why demand is rising, as U.S. vehicle sales accelerated to annual pace of nearly 17 million units last month – the fastest pace in almost eight years!
In addition, platinum demand from exchange-traded funds ETFs) remains strong. ETF holdings hit a record 88 metric tons on June 20, with those levels remaining steady. Also, the world’s biggest platinum ETFs just happen to be based in South Africa, too.
Add it all up, and we’ve got a total platinum supply deficit in the region of 800,000 ounces this year – possibly more.
And with the problems in South Africa not going away anytime soon, the deficit will mean higher platinum prices for the foreseeable future.
To play this scenario, consider buying physically backed platinum ETFs. For example, the ETFS Physical Platinum Shares (PPLT). The annual management fee is just 0.6%, and your holding is safely stashed in vaults in London and Zurich.
And “the chase” continues,