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Platinum Group Metals: Ready to Strike Back?
Platinum Group Metals: Ready to Strike Back? ELEVATED STOCKPILES LIMIT PGM RALLY BUT THINGS MIGHT BE ABOUT TO CHANGE
Supply disruptions have historically been a major driver of PGM prices but recovery in demand is fundamental for sustainable gains in PGMs prices. While above-ground stockpiles have so far limited any potential price upside, PGMs appear well positioned to benefit from the recent stock drawdowns and the improvement in the global business cycle.
Platinum Group Metals (PGMs) have begun 2014 on a positive note, with platinum gaining 7% and palladium up 14%. While most of the price support over the past few months has been due to supply disruptions in South Africa and fears of trade sanctions being imposed on Russia, a recovery in demand is fundamental for gains in PGMs prices to be sustained.
• The extensive use of platinum and palladium in vehicle catalytic converters makes their demand particularly sensitive to economic, industrial and market conditions at global level. Auto sales in the US, China and Europe, the three biggest regions by consumption, have shown signs of improvement, with combined sales up 12% in the first four months of 2014 on the previous year.
• Large deficits are already expected in both markets in 2014 and recent supply disruptions are further exacerbating the situation. As of end of April 2014, Thomson Reuters GFMS expected both platinum and palladium to be in a substantial physical deficit, equal to 0.7moz and 1.3moz respectively.
• South Africa is the world biggest producer of platinum and the second largest producer of palladium, with 72% and 37% of global mine supply coming from the country. Strikes in South Africa have entered their 17th week, eating into inventory that major global producers had kept aside for such events.
• Despite various attempts being made by producers to find an agreement, the strikes are still on-going and have begun to turn violent. With over 750,000i ounces of platinum and 550,000ii ounces of palladium production lost to the strikes so far (equivalent to over 13% and 9% of global mine supply, respectively), Amplats, Implats and Lonmin have declared force majeure on some of their contracts, highlighting the difficulty in getting supplies of metal to buyers.
According to Thomson Reuters GFMS estimates, a further 300,000 ounces of platinum and 165,000 ounces of palladium could be lost in the aftermath of the strikes as production ramps up to full capacity.
• While metals prices have benefiting from the strikes, the palladium price has also been boosted by concerns that Russia may face trade restrictions resulting from its conflict with the Ukraine. With over 40% of world supply of palladium produced in Russia, any restrictions on Russian palladium exports would further constrain an already tight market. While the outcome of the dispute and whether or not international trade sanctions are imposed on Russia is difficult to predict, unless tensions ease, palladium is likely to continue to benefit in the short-term.
• We remain positive platinum and palladium price fundamentals in the long run. Although both markets have become a lot tighter over the past months, we believe the catalyst for a sharp rally would be for one of the top 3 producers (Amplats, Implats and Lonmin) to fail to meet all contractual obligations or to announce active metal buying on the open market to supply its contracts.
• We believe the reason that prices have not reacted more strongly to supply disruptions is due to potential alternative supply coming from abundant above-ground stocks of PGMs. Consensus estimates indicate that the market overhang for platinum and palladium is around 5moz and 10moz respectively, equivalent to 59% of global platinum demand and 104% of global palladium demand in 2013. These highly liquid above-ground stocks are held by a range of market participants, including private and institutional investors and fabricators.
• While we acknowledge that PGM prices could be subject to a correction if the heightened risks in eastern Ukraine and prolonged strikes in South Africa fade or disappear, we believe the downside risk is fairly limited.
• We maintain our bullish view on the palladium price on a medium to long-term basis and recommend long term investors, and those wishing to hedge against worst case Russian-Ukraine scenarios to maintain their positions. We continue to hold our medium-term price target of US$858/oz, a further 5% upside from current levels. While we expect palladium to outperform platinum this year, we believe supply disruptions coupled with stronger demand will bring the platinum price back to the levels last seen in April 2013 and therefore maintain our target at around US$1,550.
Source: Johnson Matthey, Thomson Reuters GFMS, ETF Securities estimates.
* As of Johnson Matthey Platinum 2013 Interim Review (November 2013)
** A): Includes estimated 1050koz (18% of 2013 global mine supply) of platinum and 550Koz (9% of 2013 global mine supply) of palladium lost from South Africa strikes. Demand based on 5 year average.
**B) Adds on estimated potential lost supply if Russian platinum and palladium exports are completely banned (an unlikely scenario in our view). We estimate that this would remove the equivalent of an additional 15% of global palladium supply and 6% of global platinum supply compared to Scenario A
From 18 to 19 November 2024, Brazil will host the G20 summit in Rio for the first time as the focus of the world’s most important platform for global economic cooperation.
The coalition, which includes the USA, China, India, the E U and, most recently, the African Union, represents the world’s most important economies, which, according to OECD figures, account for around 80 per cent of global gross domestic product, 75 per cent of world trade and two thirds of the world’s population.
Since Brazilian President Luiz Inácio Lula da Silva (Lula) took up his third uninterrupted term of office at the beginning of 2023, he has spent a lot of time abroad to improve his country’s image in the world. His efforts could pay off. A recent Pew Research survey found that most Brazilian adults are optimistic about their country’s status as an international power.
In addition to the G20, Brazil is also set to host other high-profile events such as the UN Climate Change Conference (COP30) and the BRICS summit (Brazil, Russia, India, China and South Africa) in 2025, while also seeking membership of the Organisation for Economic Co-operation and Development (OECD).
In the almost three years since Brazil initiated its formal accession process for OECD membership, the country has achieved many milestones on the road to this goal. If successful, Brazil would be in a unique position to influence the increasing geopolitical and economic competition between industrialised and developing countries, as it is the only country to be represented in the BRICS, the G20 and the OECD simultaneously.
As the eighth largest economy in the world and the largest economy in Latin America, Brazil could be a strong link in the global discourse on key issues for the Global South (according to UN Trade and Development, the Global South essentially comprises Africa, Latin America and the Caribbean, Asia excluding Israel, Japan and South Korea, and Oceania excluding Australia and New Zealand).
These issues include, above all, the fight against hunger, poverty and inequality, sustainable development and the reform of global governance. If Brazil is able to achieve political and financial commitments to progress on priorities such as digital infrastructure, this could lead not only to an increase in Brazil’s GDP, but also to a narrowing of the economic and urban-rural divide and a reduction in gender inequality. Consider that the introduction of a relatively new instant money transfer platform operated by the central bank, known as Pix, has already promoted financial inclusion and increased access to banking services from around 70 per cent of the population to more than 84 per cent (source: Carnegie Endowment for International Peace).
We expect that an OECD seal of approval for Brazil will also encourage global investors seeking the assurance of the Coalition’s high standards for the ease of doing business. A seat at the table would give Brazil a stronger voice in shaping best practices and global frameworks for rapidly evolving technology standards. Brazilian companies specialising in artificial intelligence and financial technology are already among the largest in South America.
As the largest oil producer in Latin America, resource-rich Brazil is a leader in the energy sector, as it is one of the ten largest oil producers in the world (according to the U.S. Energy Information Administration, Brazil produced 4 per cent of the world’s total oil production at the end of 2023). However, the country’s largest sector is finance, with a weighting of more than 36 per cent according to the MSCI Brazil Index.
Central bank in interest rate hike mode
High government spending continues to be a major problem. In our opinion, any reduction in this spending would give the country’s capital markets cause for optimism. Meanwhile, Brazil is an exception to the global trend of falling interest rates: In September, Brazil’s central bank raised interest rates to curb inflationary pressures. The market expects the Brazilian real to remain stable or appreciate slightly in the near future, partly due to falling US interest rates. We see this as a potential advantage for foreign investors in Brazil.
It is also encouraging to see that progress is being made on Brazil’s long-awaited VAT reform, which could further boost the private sector as efficiency gains from a simpler tax system would favour investment.
Growth in Brazil’s manufacturing and services sectors accelerated in September as output in both sectors increased, indicating strong growth in economic activity. In addition, the Brazilian market is currently trading at valuations that we consider favourable. Improved conditions in Brazil’s manufacturing sector have been driven by a resurgence in production, stronger job creation and a pick-up in sales growth, according to S&P Global. At the end of September, Brazil’s Manufacturing Purchasing Managers’ Index was surpassed only by India, rising to 53.2 (from 50.4 in August; readings above 50 indicate expansion).
Chart 1: Brazilian Purchasing Managers’ Index
Source: FactSet, Markit Economics
Expectations are also high that Brazil will experience an economic boost in 2027, having won the historic bid to host the FIFA Women’s World Cup – a first not only for Brazil, but for the whole of South America.
Over the near term, we believe investors should stay attuned to the opportunities in Brazil and may find what we consider an attractive entry point into this large and diverse market.
Chart 2: The valuations of Latin American equities look favourable
Attractive valuations compared to industrialised countries, emerging markets and own history
Chart 3: Latin American equities offer high dividends
High dividend yield compared to industrialised countries, emerging markets and own history
From Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton
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