PGMs Climb After South African Strike; Analysts List Bullish Price Outlooks

Monday July 8, 2013 12:17 PM

(Kitco News) - Platinum group metals are sharply higher Monday after a strike against the world's largest producer, and analysts see further gains down the road as South African labor issues continue to simmer and the global economy picks up.

The metals bounced from long-time lows that were blamed largely on prior sympathy selling with gold.

As of 11:45 a.m. EDT, October platinum was up $33.10, or 2.5%, to $1,359.50 an ounce on the New York Mercantile Exchange. September palladium rose $17.40, or 2.6%, to $694.95.

Gold is also higher, lending some support to PGMs. But analysts say the key catalyst for platinum and palladium is a walkout by some 5,600 workers at Anglo American Platinum largely in protest of the suspension of leaders of the Association of Mineworkers and Construction Union, reportedly for joining a sit-in protest. The walkout occurred at the Thembelani and Khuseleka 1 mines.

"That triggered the buying," said Afshin Nabavi, head of trading with MKS (Switzerland) S.A.

October platinum fell as far as $1,296 an ounce on the final trading day of June, a loss of 25% from the high for the year of $1,734.40 that was hit on Feb. 13. Palladium dipped as far as $629.40 on June 27, a loss of 20% from its high for the year of $785.95 on April 1.

"They were dragged down by the slide in gold, which affected the entire bullion complex," said Jim Steel, precious-metals analyst with HSBC. "But their underlying fundamentals are tight."

Gold tumbled largely on expectations that the Federal Open Market Committee will start to taper its quantitative-easing program yet this year, with redemptions from exchange-traded funds exacerbating the move. Additionally, PGMs were hurt by concerns about slowing economic conditions in China and continued weakness in much of Europe, observers said. The period from June to August also tends to be a seasonally softer demand period for industrially oriented metals such as PGMs, one said.

Nevertheless, for some time observers have suggested that support for PGMs could come from supply disruptions in South Africa, since a number of major producers face wage negotiations. The country provides an estimated three-quarters of the world's platinum-mine supply and, along with Russia, is one of the two primary palladium producers.

"Any new labor action that develops will get people a little bit concerned," said Bart Melek, head of commodity strategy with TD Securities. This is especially the case after violence last year that led to more than 40 deaths, including 34 in a single day when police fired on protesters at a Lonmin mine, others said.

Even as PGMs were slipping lately, a number of analysts published reports saying they were constructive on prices for the longer term. Many cited supply deficits due to the South African labor turmoil, ideas that Russian state stockpiles of palladium are nearly depleted, and expectations for improving demand as the global economy picks up. The main industrial use for PGMs is automotive catalysts.

"We're bullish on both platinum and palladium," Steel said.

Melek said he would not be surprised to see platinum get back to $1,700 by the end of the year and palladium up to $800. Rohit Savant, senior commodity analyst with CPM Group, said he sees platinum getting back to $1,550 and looks for $800 palladium.

"I've been on record saying dips in PGM prices should be buying opportunities because the fundamentals look decent," Melek said.

There is potential for platinum supplies to be curtailed even without any strikes over wages. Early in the year, Amplats said it wanted to mothball some unprofitable mines. Analysts said some companies have struggled with prices below all-in costs of production for a while now. Some observers have suggested that producers' struggles to be profitable could mean increased potential for strikes since companies have no choice but toe the line on costs, while others have said this also might mean a more conciliatory approach from unions than otherwise would be the case.

Savant said platinum is bolstered largely by supply issues, while palladium is helped by a combination of demand and supply. In particular, he said, palladium is getting a lift from a recovering U.S. auto market.

The U.S. market leans toward gasoline-powered vehicles that can use less-expensive palladium in catalytic converters, compared to Europe and its tendency toward diesel-powered vehicles which require platinum. Data last week showed that sales in the U.S. auto industry rose by 9% in June to finish the month with an annualized sales pace of 15.96 million vehicles, the most since November 2007.

"That is definitely supportive for fabrication demand," Savant said. "You also have potential for a new palladium ETF (exchange-traded fund) in South Africa."

A platinum-backed ETF in the country was launched in South Africa by Absa Bank at the end of April and quickly accumulated a half million ounces of the metal, accounting for roughly a quarter of global ETF holdings. Absa Bank is working to bring a palladium ETF to the market.

"We are positive on the PGMs - both palladium and platinum," Savant said. They could be sideways for a couple of months, he said. Then, "we should start to see a good pick-up in prices maybe in the fourth quarter."

Read the latest news in gold and precious metals markets at Kitco News.

By Allen Sykora of Kitco News;

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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