(Kitco News) – Supply problems are supporting the platinum group metals, and palladium could start to outpace platinum as that market is closer to seeing a balance between supply and demand, according to one precious metals strategist.
Palladium has been lagging platinum so far in 2012, said Anne-Laure Tremblay, precious metals strategist at BNP Paribas. That is in part because the market has been focusing on the issues surrounding the South African mining industry which affects platinum more than palladium.
But palladium’s supply outlook is a bit more precarious, particularly after Norilsk Nickel said palladium output could fall 3% in 2012, she said. The firm produces about 40% of the world’s palladium, so their forecast for lower production is significant for the market. Based on this, global palladium output could fall 1% and she said palladium could be in a supply deficit for 2012-13, while platinum’s supply is expected to be in a surplus in 2012-13, even with output slowdowns in South Africa.
If the global economy starts to pick up, demand for palladium could rise further, especially since palladium use is skewed toward emerging markets and the type of autos they purchase there. This is particularly important since European growth is expected to be at best flat in 2012, she said. Tremblay spoke on a conference call Thursday.
“We are more bullish palladium versus platinum on demand ideas,” she said.
SIX POINTS DRIVING SOUTH AFRICAN WOES
There are six reasons why the platinum markets are focusing on the problems in South Africa, she said. They do affect palladium as well, but palladium production in the country is smaller that platinum.
First are work stoppages ordered by the Department of Mineral Resources under a decree known as Section 54. The stoppages are related to safety and usually occur after accidents, but Tremblay noted that more shutdowns are occurring even without accidents.
She gave the example of Anglo American Platinum, which said in the fourth quarter 2011 it had 32 Section 54 stoppages compared to about half as many in the third quarter.
This can affect output, but she said it affects different companies in different ways, depending on the amount of stockpiles built up.
Tremblay said there have been some ongoing discussions with the department and companies on the issue. Based on that, by the second half of the year, she said that these work stoppages may normalize. That doesn’t mean they will completely stop, but return to a more normal pace.
Second, the work stoppages have led to lowered platinum production in South Africa in general, as noted in recent fourth-quarter earnings reports by the major miners, she said. Because of that, she said at best South African output will be flat on the year for 2012, with little pick-up in production elsewhere in the world.
Political considerations in both South Africa and Zimbabwe are a third point. One bit of good news, she said, “and it’s the only bit of good news,” is that the latest reports from South Africa show the country continues to be against mine nationalization, despite loud calls from some sections of the African National Congress.
Otherwise, royalty fees have increased and in Zimbabwe there is growing risk of the Mugabe government trying to force platinum producers to give 51% of the mines back to the local population, she said. In Zimbabwe platinum mining has done very well, better than in South Africa, she said, but this effort in Zimbabwe is “a very big risk,” she said.
The labor issues in South Africa are well known and is the fourth issue affecting mine supply. The latest issue is the strike at the Rustenburg mine, owned by Impala Platinum. The strike stated on Jan. 20 and about 3,000 ounces a day in productions is likely lost. That means about 60,000 ounces in output has been lost, she said, which is equal to about 1% of global platinum production.
The strike now affects nearly half the workforce and may have spread on two factors – one a new union, the AMCU, is beginning to get a foothold, and second bonuses that were tied to output have fallen, and output has fallen in part because of the Section 54 stoppages, she said.
Labor issues are “always in our outlook,” but she said the combination of the safety stoppages and the new union looking to gain members could mean strikes could become more prevalent in 2012.
Inflation and rand appreciation are the fifth and sixth issues affecting South Africa, she said. Inflation for these mining companies is significant, with salaries contributing about 8% to 10% annually to the mining producer price index, she said. Power also contributes significantly.
Although power costs have risen sharply, she is less concerned about the risk of power loss for the platinum industry, although it is always a consideration.
Finally, South Africa’s currency unit, the rand, has appreciated greatly, up 17% since 2010, which has been hitting profitability of these miners, she added.
Debbie Carlson-Kitco February 9, 2012