CAPE TOWN (miningweekly.com) – Platinum’s slide down the slippery supply slope has already begun in earnest with the South African industry depleting its proven and probable reserves by an average of 10% a year since 2008, says SFA-Oxford CEO Stephen Forrest.
Forrest, who addressed the Mining Indaba in Cape Town, singles out Anglo Platinum’s Rustenburg mine as the “biggest culprit”.
“A major reason is that many mines are not fulfilling their potential through, perhaps, weak management and definitely a lack of funding,” he says.
The bottom line is that supply is set to run short for some time through a lack of investment as well as an inherent under performance on most mines.
Recycling is also under strain and will continue to fail to reach capacity without concerted effort and ultimately prove little help to making up the gap of primary supply.
“In short, limited supply means higher prices, resulting in increased risk of substitution,” Forrest warns.
Real-term deficits in supply are being “shoddily propped up” by a lack of stay-in-business capital and foreign direct investments.
“Unless we get a handle on this under-funded, under performing industry, the supply gap is likely to topple, causing a significant damage to the markets and directing growing economies to look elsewhere for alternatives,” Forrest warns.
In order to address the opening gap in supply, something needs to be improved significantly, otherwise good money will be thrown after bad.
Over and above the more challenging operating conditions associated with deeper mining, safety shutdowns, skills shortages, power cuts and mounting government intervention, supply growth will disappoint further as funding to replace and expand production existing operations has been severely cut, with R2,4-billion of stay-in-business capital being removed.
Reductions in capital expenditure since the collapse of 2008 has already led to delays in project start-ups and ramp-ups.
At present it looks unlikely that new platinum production in projects in the rest of the world will make up any supply in the gap.
Platinum has robust future demand growth profiles and new demand requirements will only exacerbate the primary supply shortfall.
With primary supply set to peak, a widening supply gap is expected.
While new projects could add something like 400 000 oz of new production, most projects need a platinum price of well over $2 000/oz.
Given the constraints of primary supply, increased recycling is the most likely option to fill the supply gap, particularly in the next ten years.
However, this would involve increasing 2009’s global recycling rate by 20% to nearly 48%, increasing thereafter by another 15% each year to 2015, effectively doubling the rate of 80%.
This is unlikely to happen and would require a quantum shift in recycling attitude.
The growing palladium content of recycled autocatalysts will result in a growing palladium/platinum ratio before platinum volumes will pick up.
Without real challenges on supply, China could single-handedly increase the supply-demand differential in real terms, but in no way will it be able to pick up the demand torch should Europe shift into a second dip recession.
By 2018, palladium will be outpacing platinum demand by at least two to one.
“Despite the challenges faced, the outlook for these metals remains favourable, but is somewhat fragile,” Forrest says.
The head of the specialist PGMs consultancy sees the automotive sector staying firmly with gasoline, meaning that palladium demand will remain high.
By 2018, China is going to need 700 000 oz of palladium a year, by which point demand will be equal to that of platinum.
Over the next decade, the consultancy sees platinum demand from China increase robustly, far outweighing the capabilities of supply the growing gap, leading to a sustained deficit market.
While China’s automotive sector is growing, its internal consumption is still dwarfed by other global car markets with only 3,7% of the country’s car-owning population, meaning that demand is lagging behind where it could be.
Further, high production figures from China's automotive sector skew platinum and palladium demand numbers owning to China’s relatively slow pick up of global emissions legislation.
Demand from the European economy is key to the PGMs industry, particularly in the automotive sector.
Half of global automotive demand is in Europe, while western Europe accounts for only 25% of total demand.
If a European crash were to occur, car sales would plummet as significantly as they did in 2009/10, reaching similarly low levels.