Platinum: Time for a cartel? – by Adrian Saville (Mineweb.com – July 1, 2015)

http://www.mineweb.com/

The chances are slim, and a stabilisation fund might be a better alternative.

An op-ed by Dr Adrian Saville, Professor of Economics at the Gordon Institute of Business Science, and Chief Strategist at Citadel.

In spite of the beleaguered platinum sector effectively being an oligopoly, with three suppliers controlling the bulk of new mine supply, the industry is a price taker, vulnerable to wild swings in the prices of platinum group metals (PGMs).

There are several reasons for this, including an increasingly efficient use of metals – meaning that demand doesn’t grow at the same pace as industrial activity – and a rising contribution from recycled platinum. As a consequence, supply consistently exceeds demand, translating into platinum being a “surplus industry”. Producers are thus weaker than consumers, making them price takers.

To add evidence to the above, new mine supply of platinum has slipped steadily to 5.1 million ounces (Moz) in 2014 from a peak of 6.8Moz in 2006. Secondary supply from the recycling of autocatalytic converters and jewellery has risen from 0.7Moz in 2004, to over 2Moz in 2014. This shrinking contribution of mined output – falling from 90% of supply in 2004 to around 70% today – specifically undermines the pricing power of primary producers.

On the demand side, in 2014 over 60% of platinum was consumed by industry, especially automakers. Jewellery accounted for 35% of offtake while just 3% went to investments. For producers, it is helpful that this demand pattern makes the platinum industry structurally stronger than the gold market, where investment and jewellery demand account for the majority of usage, meaning almost all demand is stockpiled, effectively held as deferred supply.

Recently stockpiled platinum has been used to meet excess demand, especially during the punishing platinum strike on South African mines during the first half of 2014. The same strike should have translated into the platinum price skyrocketing if the platinum industry was in balance and there were no stockpiles.

Regardless, with production back to pre-strike levels, inventories are being replenished and, if anything, the structural surplus is understated because of investment offtake which is simply deferred supply, being held in a different hole until such time as there is an adequate deficit and/or acceptable price for stock.

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