South Africa ’s power cuts are serious. There is no doubt about that. A contact, who recently returned from a business trip to Johannesburg, says outages were happening for between two and four hours a day.

Businesses are supposed to be informed when the lights will go out, but apparently the reality is quite different. The outages are random. Worse still Eskom, the state electricity supplier, has its “head well and truly buried in the sand”. Bad news for miners!

But today our musings are on the impact this is having on platinum prices. And here, at least, there may be a bit of light in the darkness! Precious metals consultancy GFMS recently released its 2008 Platinum and Palladium Survey. Its view is that the outlook for the platinum price is good – in the short term, at least. Supply and demand are tightly balanced, so at the moment “any supply disruptions will have noticeable consequences for the platinum market”!

AngloPlat proves the point

And supply disruptions are expected! Electricity is not the only problem for miners in South Africa, supplier of 80% of the world’s platinum. It now seems certain that a much tougher line will be taken on mine safety. Climate change has made weather unpredictable, too. Severe flooding has affected output at several mines. Add to this the fact that production in Russia, the world’s second biggest producer, has contracted. If it is going anywhere, the price of platinum is going up.

To prove the point, refined platinum production in South Africa slumped 18.9% in the first quarter of this year. And, surprise, surprise that was down to power shortages!

Poor old Anglo Platinum, the world’s biggest producer, was hardest hit. Its production fell a significant 24% in the first quarter, with the shortfall for 2007 coming in at around 136,500oz – or 8% of the world’s total refined supply.

That said, in spite of output which one analyst described as “shocking”, AngloPlat it is still on target to produce 2.4 million ounces this year. There is still ore in the pipeline from the first quarter. Repairs at the Polokwane smelter – shut down because of flooding – will be completed, putting that pipeline back in the picture.

 

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This could be wishful thinking. AngloPlat seems resigned to the fact that power shortages “will continue to hurt production and expansion projects this year”. In fact, it is estimated that a further 120,000oz of platinum will remain in the ground. So the world will be 250,000oz short of Anglo’s platinum this year. At the very least!

You see the forecasts also presume that there will be no safety, labour or technical problems this year. Now we know South Africans are eternally optimistic. But this might be pushing it a bit.

The only way is up up UP!

So, in recent weeks the platinum prices have fallen and stabilised as the dollar strengthened. Other precious metals have been hit, too.

But it is worth remembering that three quarters of the world’s platinum comes from South Africa. And not only does South Africa have a serious power crisis, it is also not immune to political crises! Moreover, South African supplies are dwindling. Furthermore, much of the balance comes from Russia and political tension there could herald more supply troubles.

Platinum is a rare metal and not exactly easy to mine…which all points to another platinum deficit. In 2007 there was a platinum deficit of 412,000oz. Okay so the deficit won’t be so big this year says VM (Virtual Mining) Group. But VM Group’s Lindsay Williams still reckons that mined platinum supply has “never been more vulnerable”.

So, while platinum may be overbought in the short term, the fundamentals of platinum for 2008 point to rising prices. Platinum started 2008 at $1,530/oz. Some say it could go to $2,400 by year end.

Words of warning

What goes up must come down, says Erin. You only have to look at what has happened to the fall back in all precious metals prices recently to see truth in that old cliché! What’s more, high prices could curb demand. Jewellery sales, for example, have certainly pulled back by some 268,000oz this year. And palladium could eventually replace platinum in auto-catalyst converters.

All that has not stopped investors from throwing money into platinum-backed exchange traded funds (ETFs). Just for the record, platinum group information specialists Johnson Matthey says the combined positions of various platinum funds in February 2008 was 330,000oz, up from just 50,000 oz in July 2007.

Of course, ETFs allow investors to benefit from rising (one hopes!) prices of commodities without having to take physical delivery or enter the futures markets. Platinum ETFs differ from other precious funds. There is significantly less refined above ground stocks than in, say, silver and gold. Platinum backed ETFs reduce liquidity in the market, which in turn reinforces price movements.

And there is still potential for profits, it seems! GFMS reckons that the worst case scenario will see platinum prices of $1,700 by the end of 2008. Moreover, there is “every possibility” that the price could be hovering at $2,400 by year end. Yet in current volatile markets buying in at the right time is obviously crucial!

So, for the moment at least it looks as though there is still some glitter in platinum.

Keep mining,

Erin and Isabel