For a while now, I’ve been watching the platinum producers with some incredulousness. Which is a big word – but appropriate. Because there is something discordant in the way the sector is unfolding.
Let’s start with the FTSE/JSE Platinum Producer index (which is made up of the main 6 platinum miners listed on the JSE), which is busily reaching new lows of low:
Then let’s turn our attention to Lonmin, Implats and Amplats, and have a look at what they’ve been doing for the last 5 years (the long and languid decline of share price):
Which brings us to the most recent 6 months (less languid):
Meanwhile, the platinum price over the last year:
And if you compare that to Lonmin and Implats relative price changes:
All in all – it’s dismal.
The Industry Outlook
Whenever you read articles on this, you get the same buzzwords all the time:
- Thin Margins (mostly, thanks to 5 and 6 below)
- Stretched Balance Sheets (I assume this means cash flow to debt awkwardness?)
- Not enough capital investment (and why would you, given 3 through 9?)
- Government animosity (“Don’t you fire anyone!”)
- Rising labour costs (Oh AMCU…)
- Weak platinum price (see graph above)
- Palladium substitution (in catalytic converters)
- China woes (bored by this now)
- “Abundant above-ground stocks” (mmmm – yes)
In a pointed narrative:
- Platinum is more expensive to produce than it is to sell (ie. its mined cost is greater than its selling price).
- But governments are reluctant to allow restructurings that would lower that cost (because it would result in job losses).
- When faced with that sort of non-profitability, capital replacement seems crazy – because that’s investment, and why would you invest for very little short-term return?
- Also – you need money to invest. And if you were to try and raise that in the equity markets… Well let’s just say that issuing shares when your share prices are at all time lows is not really the best time to go about a capital raising.
- Somehow, in the face of all this slow production (and in particular, in the face of future slow production as a result of the no-capital-replacement), the platinum price has continued to decline.
- It’s not a demand problem (or so we’re told). Despite the slightly slower demand from China:
- Emissions regulations are tightening
- Platinum ETFs are popping up all over – and they need to hold the platinum underlying their fund size.
- India has discovered platinum jewellery.
- The trouble, it seems, is over-supply.
- Or, more specifically, those “abundant above-ground stocks”.
So let’s talk about those abundant above-ground stocks. Based on the Johnson Matthey 2013 Interim Platinum Report (that’s the latest I could find – although it’s cited everywhere, so it must be important), in 2013:
- Platinum demand was due to rise to around 8.42 million ounces.
- Platinum production was expected to be around 5.74 million ounces.
- Platinum recycling was expected to be around 2.08 million ounces.
- In case you don’t have a calculator, this means that there was meant to be a shortfall of around 605,000 ounces.
Of that production, SA was meant to be responsible for around 4 million ounces.
Anyway, it seems that the platinum producers prepared themselves for the strike period by building up stocks to sell:
It sold some of those stocks to speculators:
Which is, you know, not always the best idea. Because really, what’s a speculator going to do with many thousands of ounces of platinum?
The correct answer is: “sell them immediately because storage and delivery costs oi vey”
Or, to quote Bloomberg:
Platinum producers enforcing contracts with fixed delivery amounts on their customers has caused an oversupply of the metal, according to Rene Hochreiter and Michael Kavanagh of Noah Capital Markets.
“Being forced to take more metal than they need, the customers have been offloading excess metal to investors for years,” they said in a Sept. 19 note.
To me, this says that platinum is going through an awkward patch where:
- Supply and demand have completely disconnected from production.
- The long-term sustainability of production (and, therefore, supply) is very much dependent on how quickly everything reconnects.
- If it reconnects at all.
Which is the definition of an industry slump.
And if you’re an optimistic investor, you’ll say that it’s only a matter of time.
Some Accounting Comparisons
Does that not seem a bit bizarre to anyone else?
If this is an industry issue – then why the grand discrepancy in individual platinum producers?
Unless the general idea is – not everyone will come through this. Smallest in, first out?