High PGM prices are here to stay

Robust prices can mask a multitude of sins, though not for long in mining, the most cyclical of all major industries. Producers of platinum group metals (PGMs) seem relatively immune to the old adage, even though prices have eroded to the US$440-per-oz. level for both platinum and palladium from a high earlier this year of more than US$1,000 per oz. for palladium and more than US$600 per oz. for platinum. Most analysts see continued good times for PGM producers, with Canaccord Capital’s Roger Chaplin predicting long-term prices of US$500 per oz. for both metals.

In a research report, Chaplin gives the nod to several major producers expected to reap the benefits of high prices and increased production. South African giants Anglo Platinum and Impala Platinum, both of which are listed on the Johannesburg Stock Exchange, were given “strong buy” ratings, while London-listed Lonmin and Stillwater Mining (SWC-T) were rated as “buys.”

By 2005, Chaplin expects total demand growth for platinum, palladium and rhodium to grow to 16.7 million oz. from 15.3 million oz. in 2000, even after including a modest fall (to 15.5 million oz.) in demand this year. Growth will once again be driven by the use of PGMs in autocatalysts, which last year accounted for half of total Western demand. However, because of the economic downturn, he expects the use of PGMs in autocatalysts to grow at a slower rate in the next five years — to 2.8% per year for 2000-2005, compared with 12.2% per year for 1985-2000.

Although palladium made up 72% of the net demand for PGMs last year, a major switch back to platinum is keeping the PGM market in balance. As a result, Chaplin expects the palladium price to remain closer to that of platinum than in the past. Other analysts are of a similar mind.

On the supply side, Chaplin expects mine production of the three main PGMs to grow by 68% in total, or 10.9% per annum, to 12.2 million oz. by 2005 from 7.25 million oz. in 2000. Half of last year’s production came from South Africa, while one-third was from Russia, mostly as a byproduct from the mines of Noril’sk Nickel. The balance came from North America and other smaller sources.

Chaplin cautions that mine production is only part of the PGM story and that the total level of supplies must also be considered. “The major difference between mine production and market supply has been the Russian stockpiles of PGMs, which have been built up and, more recently, run down,” he states.

Russian mine production and the level of Russian stockpiles are both state secrets. However, based on past performance and a proposed expansion at Noril’sk Nickel, Chaplin estimates that Russian mine production could grow to more than 5 million oz. of the major PGMs by 2005. And because the level of exports from Russia since 1993 has been well above mine production, he estimates that the stockpiles have fallen by about 18 million oz. over the past seven years. Most of the fall, an estimated 16 million oz., was in palladium.

In the years ahead, Chaplin expects that reduced supply from Russian stockpiles will offset production increases from expanded operations and new projects elsewhere in the world. “The net effect,” he says, “will be that Western supplies of PGMs will grow from 13.8 million oz. in 2000 to 16.8 million oz. in 2005, an average rate of growth of just 4% per annum.”