South Africa output topples platinum, palladium prices

Platinum futures trading on the Nymex market in New York lost $28 an ounce to $1,155 on Thursday, a drop of 2.4% from the 15-month high hit yesterday. Palladium contracts shed 4.8%, dropping to below $700 an ounce retreating from its highest level since June last year.

Platinum and palladium prices tends to be volatile thanks in part to a highly concentrated supply environment. Together Russia and South Africa control between 70% and 80% of the world’s supply of PGMs. The structure of supply has not altered in any substantial way since the 1970s when platinum and later palladium came to the fore as an important part of the world’s automobile industry.

In an industry where labour costs make up for around half of overall operating costs, producers have probably decided to build their inventories in case of any disruptions emerging from the talks

A jump in supply is also behind Thursday's sharp pullback in PGM prices after data from South Africa showed mines in the country's platinum belt humming along.

Production of platinum and palladium (South Africa also produces 80% of the world's rhodium) fell by 12.4% in June compared to prior month. But May output was the second highest on record and production is still rising on a year-on-year basis.

Revenues from PGM sales in the local currency also hit a record high in May, which Capital Economics points out in a research note, came on the back of the biggest month on month increase in the rand price of platinum since the first half of 2014 when the industry was crippled by a five month strike. Although it has strengthened in recent months, the rand was one of the worst performing emerging market currencies during the first half of the year.
South Africa output topples platinum, palladium prices
London-HQ'ed Capital Economics says the strength in PGM production partly "reflects the sustained price rally experienced since the start of the year which has weakened producers’ financial incentive to cut back output:

"What’s more, following a slump in output earlier in the year owing to a disruptive safety stoppage, industry leader Amplats has been determined to meet its 2016 production targets and has thus ramped up operations to regain lost ground.

"We also think it is likely that the production ramp-up in Q2 has also been the result of producers preparing themselves for the summer wage negotiations with trade unions, which commenced in July. In an industry where labour costs make up for around half of overall operating costs, producers have probably decided to build their inventories in case of any disruptions emerging from the talks."

Despite today's pullback, platinum is performing better than gold in 2016 with a year to date advance of a shade over 33%. The precious metal was up 12.7% in July, best monthly performance since 2012.

Sister metal palladium enjoyed its best month for nearly a decade, soaring more than 21% in July. Its performance for the month constitutes the bulk of its gains year to date and measured from its January 12 low the metal is up 47% or $220 an ounce.