Brighter Outlook for Platinum as Gold Loses its Lustre

January 14, 2013 at 08:44

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The platinum-gold spread – or the difference between the price of gold and platinum – has been narrowing from above $100 a troy ounce.

Spot gold is now at $1,662.80 an ounce and spot platinum at $1,632.25. This means the spread has narrowed to just $30.50. There is a real chance that the price of platinum could move above that of gold in the next few months.

“Platinum markets have started the year positively and could be, along with silver and palladium the commodities to watch in 2013, especially if industrial demand continues to improve,” says Kieron Hodgson, an analyst at broker Charles Stanley.

The platinum industry is in the middle of a significant shake-up. Following on from violent strikes at some South African platinum mines last year, Anglo American Platinum, or Amplats, is on the verge of announcing a comprehensive business review.

Amplats is the world’s largest producer, with South Africa mining about 80pc of the metal globally. Amplats is 77.3pc owned by London-listed miner Anglo American.

The most likely consequence will be lower production as high-cost mines are mothballed.

Platinum mining is a very expensive and dangerous business. Deposits tend to be very deep and temperatures are high, which means costs between mines can vary significantly and some can be very expensive to operate.

However, with Anglo American being the largest private sector employer in South Africa, mine closures are a very politically sensitive issue.

Indeed, the political backdrop is getting increasingly tense. Last week credit rating agency Fitch downgraded its rating on South Africa to the second-lowest investment grade.

“Social and political tensions have increased as subdued growth, coupled with rising corruption and worsening government effectiveness, have constrained the government’s ability to improve living standards, reduce the 25.5pc unemployment rate and redress historical inequalities as rapidly as the population demands,” Fitch said.

Still, production cuts are expected and, in addition, platinum prices could rise as last year’s strikes have already hit supply. Last year’s events will cause a 12pc drop in supplies of the metal to 4.25m ounces, the latest Johnson Matthey platinum review said.

Professional investors such as hedge fund managers are getting increasingly bullish. They have increased their “net long” position in New York-traded platinum futures, according to the latest data from the weekly Commodity Futures Trading Commission’s Commitment of Traders report. This is a 5pc week-on-week increase.

There has also been lots of speculation that Amplats could sell its higher cost mines. This is very unlikely.

The mines are likely to be put on care and maintenance rather than sold, because now is not the right time. Why on earth would a company sell at what could be described as the bottom of a market?

Credit Suisse is forecasting that closures could take more than 200,000 ounces of supply out of the market.

“The time frame over which the cuts are executed is the unknown,” Credit Suisse says. “The market wants immediate mine closures, but there is a risk that a less explicit plan is released aiming to keep production at a designated level and make more gradual high cost mine closures.”

This would be a negative for the platinum price as the market is expecting immediate shutdowns.

However, it is likely that Anglo American’s newly appointed chief executive Mark Cutifani would like to take decisive action.

If he does, the platinum price could be the precious metal to back in 2013.