SA platinum cuts to hurt global output over next two years

An ongoing drop in capital investments for South Africa’s platinum sector will hit output over the next two years, lowering global supply of the precious metal, a report released Tuesday shows.

According to the World Platinum Investment Council (WIPC), an organization created to promote the usage of the precious metal and improve market transparency, the sharp fall in South African platinum investments — from an annual $3 billion in 2008 to barely $1 billion this year — is also expected to affect the precious metal’s demand balance.

Prices for platinum — used in catalytic converters to reduce emissions and jewellery — fell last month to their lowest since March 2009 at $940.50 an ounce, which has encouraged some buyers to move back into the market, the WPIC said.

The report showed holdings of platinum-backed exchange-traded funds rose 45,000 ounces in the second quarter compared to a 50,000-ounce outflow in the first three months of the year.

"The institutions in South Africa, where the massive increase in ETF holdings occurred, are certainly looking at the lower price and reading into it, firstly their view on value, and secondly what that might mean for supply," said the WPIC.

Market deficit to shrink

The industry body also said the supply shortfall in the platinum market is expected to decline this year to 445,000 ounces. This is almost half of last year’s deficit of 785,000 ounces.

The forecast deficit for 2015 was larger than May's estimate of 190,000 ounces, however, due to a rise in investment demand in the second quarter.

Total supply is predicted to jump by 9% to 7.9 million ounces thanks to a recovery in South African mine output from the 2014 strikes.

SA platinum cuts to hurt global output over next two years

Source: SFA (Oxford) – Click on graphic to expand.

Demand is forecast to rise by 4% to 8.4 million ounces driven by higher platinum bar purchases by Japanese investors and buying of exchange-traded funds in South Africa.

Catalytic converters demand is also expected to increase 5% to 3.4 million ounces.

Drastic measures

The precious metal is currently trading around $994 an ounce, off its low last month, but still down 17% so far this year and close to a third off 2014’s high of $1,518.25.

The slump in platinum prices has hit producers, forcing them to take some drastic measures.

In July, world’s No. 3 platinum miner Lonmin (LON:LMI) said it would close two shafts in the country and idle three others. That will result in roughly 100,000 ounces of lost annual production – 2% of global supply – and a 6,000 or 16% reduction in its workforce.

Anglo American, parent of Amplats — which on its own produces more than 30% of the world's platinum— has also decided to cut a third of its global workforce or 53,000 positions over the next few years.

And smaller player Aquarius Platinum (LON:AQP) is in the midst of reviewing the viability of its shafts in South Africa and Zimbabwe, which it shares with Amplats and second largest producer Impala respectively.