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A week in gold: Analysts remain mixed on platinum's future

Oversupply is hurting the platinum price, with producers hoping a rival will go bust.

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platinum again dropped some 1.7% on Friday to US$862 per troy ounce

The platinum industry has been through a “tremendously tough time” of late, and analysts have mixed views on the fortunes of the metal.

While platinum again dropped some 1.7% on Friday to US$862 per troy ounce, Simona Gambarini, at Capital Economics, reckons help could be on the way.

Demand is likely to rise in the coming year, she says, but the big driver for the metal’s price will be supply.

“In general, platinum supply is particularly concentrated in South Africa and Russia, and both are struggling,” she said.

The three big platinum suppliers in South Africa - Lonmin, Impala Platinum and Anglo American Platinum - are all cutting back production, she added.

They are trying to shut high-cost operations that are not profitable at current prices, and this should restrict the platinum supply.

Gambarini also pointed to previous supply and labour disruptions which have “impacted producers” and “squeezed their margins.”

As a result of tighter platinum supply, she expects the price to rise.

But this might come too late for platinum producer Lonmin, which said on Monday it is to perform a US$407mln rights issue to ensure its survival.

Lonmin makes up around 15% of total platinum supply and the news has thrown serious doubt on the miner’s ability to survive at current price levels.

Yuen Low, at Shore Capital, said even if Lonmin gets the rights issue away, and drops its production to the forecast 650,000 ounces – as it plans to – it is still the “most vulnerable to go bust”.

And “all the platinum producers are hoping each other will go bust,” he said.

But Lonmin is not alone in being at risk, with more acquisitive groups such as Glencore and Anglo American under the most pressure, according to Russ Mould at AJ Bell.

If one, or more, were to go out of business, the price will go up due to the fall in production - something that would be good for the other producers.

However, if Lonmin manages to stay in business, Mould said “the low prices will drive the weaker players to cut capacity and this culling can be very painful and can take some time.”

Shore's Low added: “If Lonmin continues, then it [the platinum price] relies on a lot of things that are very hard to call like the gold price.”

When the gold price goes up, platinum goes up, and that relationship appears to be holding, he said.

But this, he said, would be difficult with a number of drivers likely to subdue the platinum price.

The current oversupply will likely continue, despite the platinum miners trying to scale back production.

He cites the Volkswagen scandal, and more gold jewellery demand in China weakening platinum jewellery sales, as factors that may hold the price in check.

 

Major Movers for the week:

Lonmin down 43% to 9.5p.

Anglo American down 11.8% to 458p

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