(Kitco News)
- The tumble in platinum prices would probably have to last for
some time for any fresh announcements of production cuts to
occur; nevertheless some traders and analysts say the situation
merits watching in the months ahead, particularly if low prices
persist.
If mining companies' profits are small, they may be less
likely to make the capital expenditures necessary to develop
future projects, which ultimately would curtail supply and be
supportive for the market in the longer term.
"It's something you want to keep an eye on," said one platinum
trader.
Even if the dollar prices of platinum falls, producers could
still get a reprieve if the greenback were to strengthen enough
against the South African rand. This would mean producers in
South Africa, where some three-quarters of the world's platinum
originates, would be receiving more rand for their metal. And
this appears to have actually provided some relief for companies
as platinum tumbled in dollar terms during recent months, one
analyst said.
Still, the sell-off in the dollar value of platinum is
worrisome for companies since it comes at a time when costs are
escalating for South African producers. In particular, increases
in labor and electricity have been well above the rate of
inflation in the country. Adding to the concern are similar drops
in prices for metals such as palladium and rhodium that often
mined along with platinum.
Platinum for January delivery was hovering around $1,500 an
ounce early Friday afternoon on the New York Mercantile Exchange,
down from the low $1,700s at the start of the third quarter and a
peak of $1,916.80 on Aug. 23.
"If prices were to stay down at this level for a sustained
period of time…we would be in a situation where producers would
struggle with certain portions of their operation," said a
trader. "There was just not a lot of cash being put back into the
businesses even at the higher price levels….The rand is going to
have to go back to 10 or 11 to the dollar to offset this sort of
move."
Platinum is likely approaching the so-called marginal cost of
production, which can trigger output cuts in any commodity, said
David Wilson, director of metals research at Societe
Generale.
"But it wouldn't necessarily happen immediately," he said,
commenting that he does not envision any mine cutbacks yet this
year. "You would need to have prices below marginal costs, or
well into the cost curve, for at least a couple of months to
precipitate mine-production cutbacks."
Companies might want to maintain production anyway in part to
recapture certain fixed costs. Shutting down a mine and cutting
loose workers can be expensive itself, so companies must balance
costs of operating versus not operating. "A mine might be
prepared to operate for one or two or three months on a
slight-loss basis rather than stomach the fairly high cost of a
complete closure and therefore laying off mine workers and
looking to negotiate canceling energy contracts and so forth,"
Wilson said.
If Europe is not able to resolve its debt crisis-which has
hurt industrial metals due to worries about a softer economy and
thus demand--by end of the year, the prospects for potential
curtailment of mining activity would increase, Wilson said. "But
I don't think it's an issue yet for this year."
Erica Rannestad, commodities analyst with CPM Group, also
figures it's too early to expect any significant changes in
production. For the full year, the consultancy forecasts that
weighted price of a basket of platinum group metals in the
country will be above the weighed cash cost.
When companies do cut back output, they might do something
like stop producing from one area of a mine and concentrate on
others with higher ore grades instead, thereby reducing per-ounce
costs. In some instances, companies might have already sold
forward their future production at a more favorable price, she
said.
January platinum got as low as $1,434.50 this week. A further
fall toward $1,200, with weakness in other PGMs, would be "more
worrisome," she said.
Like others, she noted that costs are rising for companies,
with the cash cost per ounce likely to increase by some 10% this
year. Wage hikes have been in the region of 7% to 12%, while
electrical tariffs are up 25%.
Long-Term Production Costs Remain Supportive Of
Platinum
The roughly $200 sell-off in platinum since early July has not
necessarily translated directly into losses for South African
producers since it was more than offset by a higher price in rand
terms; nevertheless, the longer-term high costs of production
remains bullish for platinum, said Anne-Laure Tremblay,
precious-metals strategist with BNP Paribas.
"Production cost in the platinum industry is an ongoing theme,"
she said.
Determining the actual marginal cost of production is somewhat
tricky since the commodity is priced globally in dollars, but the
bottom lines for South African mining companies are ultimately
determined by the price they receive in South African rand, with
their expenses also paid in rand.
While platinum prices have fallen in dollar terms over the last
few months, fluctuations in the foreign-exchange rate between the
U.S. dollar and South African rand have actually meant South
African mining companies are effectively receiving a higher
payment for their metal, Tremblay said.
On July 6, platinum was at $1,743 an ounce. With an exchange rate
of 6.7 South African rand to the dollar back then, South African
producers would have been receiving near 11,700 rand per ounce,
Tremblay said.
Platinum has since fallen to around $1,500. But with the
dollar-rand exchange rate now at near 8 rand, mining companies in
South Africa would receive around 12,000 rand an ounce, Tremblay
said.
With cost inflation in the South African platinum industry
averaging around 10% per year, Tremblay said many companies are
struggling to maintain the investment needed to develop future
projects. "That means for the industry to make the same cash as
it is now, you would need the platinum price to go up by 10% a
year," she said.
So far, the earnings statements show companies have remained
profitable, unlike the case a couple of years ago. However,
current capital-expenditure investment may not be sufficient to
increase production levels in coming years, she said.
In fact, a trader cited data showing that it can take seven to
10 years and up to $1 billion to open a new shaft. "It's a costly
proposition."
Availability of electricity for future projects might be an
even greater worry for producers than current prices, Societe
Generale's Wilson added.
"In the near term, the platinum market remains in a hefty
surplus and demand prospects in 2012 remain weak," Tremblay said.
"Platinum's day in the sun is still some time away."
By Allen Sykora of Kitco News;
asykora@kitco.com