PGMS: Ready to strike back? ELEVATED STOCKPILES LIMIT PGM RALLY BUT THINGS MIGHT BE ABOUT TO CHANGE

South African strikes and fears of trade sanctions against Russia have recently buoyed platinum and palladium prices, exacerbating what are already expected to be large deficits in 2014. Platinum has rallied about 5% in 2014, with palladium up 11% over the same period.

South Africa is the world biggest producer of platinum and the second largest producer of palladium, with 72% and 37% of global mine supply coming from the country. Strikes in South Africa are entering their 13th week, eating into inventory that major global producers (Amplats, Implats and Lonmin) had kept aside for such events and that were initially declared to be sufficient to meet demand for only 6-8 weeks.

With over 600,000i ounces of platinum and 330,000ii ounces of palladium production lost to the strikes so far (equivalent to over 10% and 5% of global mine supply, respectively), Amplats, Implats and Lonmin have declared force majeure on some of their contracts, highlighting the difficulty in getting supplies of the metals to buyers. According to Thomson Reuters GFMS estimates, a further 300,000 ounces of platinum and 165,000 ounces of palladium could be lost in the aftermath of the strikes as production will take time to return to full capacity.

Benefiting from the strikes

While both metals have been benefiting from the strikes, the palladium price has also been boosted by concerns that Russia may face trade restrictions resulting from its conflict with the Ukraine. With over 40% of world supply of palladium produced in Russia, any restrictions on Russian palladium exports would further constrain an already tight market. While the outcome of the Crimean dispute and whether or not international trade sanctions are imposed on Russia is difficult to predict, unless tensions ease, palladium is likely to continue to benefit in the short-term.

We believe the reason that prices have not reacted more strongly to supply disruptions is due to potential alternative supply coming from abundant above-ground stocks of Platinum Group Metals (PGMs). Consensus estimates indicate that the market overhang for platinum and palladium is around 5moz and 10moz respectively, equivalent to 59% of global platinum demand and 104% of global palladium demand in 2013. These highly liquid above-ground stocks are held by a range of market participants, including private and institutional investors and fabricators.

While we remain positive platinum and palladium price fundamentals in the long run, we believe elevated stockpiles have limited recent price rises. Although both markets have become a lot tighter over the past months, we believe the catalyst for a sharp rally would be for one of the top 3 producers (Amplats, Implats and Lonmin) to fail to meet all contractual obligations or to actively purchase metals in the open market to supply its contracts. Nonetheless, PGM prices could be subject to a correction if the heightened risks in the Crimean region and prolonged strikes in South Africa fade or disappear.

Source: Johnson Matthey, Thomson Reuters GFMS, ETF Securities estimates.

* As of Johnson Matthey Platinum 2013 Interim Review (November 2013)

** A): Includes estimated 900koz (16% of 2013 global mine supply) of platinum and 495Koz (8% of 2013 global mine supply) of palladium lost from South Africa strikes. Demand based on 5 year average.

**B) Adds on estimated potential lost supply if Russian platinum and palladium exports are completely banned (an unlikely scenario in our view). We estimate that this would remove the equivalent of an additional 24.6% of global palladium supply and 3.2% of global platinum supply.

Important Information

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority.