The Platinum Market
The platinum market is diversified across auto catalysis, industrial demand and jewelry. Two important areas for 2015 in our view will be continued growth in Asian jewelry demand, especially in India, and the potential for a small re-bound in European autos as a source of demand.
This year has seen significant volatility in the platinum market with shifts occurring in supply, demand and investment as well as to metal prices and exchange rates. A platinum market supply deficit of 1.5 million ounces is projected for 2014 by industry analyst SFA (Oxford). The five-month AMCU led strike is estimated to have cut mine production by 1.1 million ounces. This resulted in South African supply to the market decreasing by approximately 616 thousand ounces, with the difference being made up by producer sales from above ground inventories. Demand is forecast to be up 5% for the year 2014 and recycling growth up 1%. Platinum prices were expected to strengthen following strike action in 2014, but it is believed that the sale of stockpiled ounces stabilized the market. SFA (Oxford) estimates that total above-ground stocks will be 10.1 million ounces at the end of the year, but not all of this stock is a market overhang, since manufacturing inventory and investment holdings will always exist. Total stocks include working inventories for closed-loop applications such as petrochemical and chemical catalysts and glass manufacturing stock, as well as metal allocated to ETFs. Excluding closed-loop and ETF ounces left approximately 3.23 million ounces in market inventories at the end of 2013. Destocking by producers and lost output from the AMCU strike have further reduced market inventories to an estimated 1.37 million ounces of platinum in immediately available stock by the end of 2014.
Despite the strike, prices have recently hit five-year lows. Prices began the year at $1,358/oz and rose during the strike. In early July, just after the strike, platinum peaked at $1,511/oz, but it has been in decline since. From the middle of September to early October the price lost over $150/oz, hitting levels not seen since 2009, at $1,217/oz on 6th October and below $1,200/oz during daily trading.
At the recent low platinum price of $1,229/oz (October 6, 2014) SFA (Oxford) calculated that more than 50% of the industry is unprofitable on a total cash cost basis. This would equate to approximately 3.43 million ounces of platinum, 1.79 million ounces of palladium and 528 thousand ounces of rhodium. At the time of writing, platinum prices were fluctuating between $1,200/oz and $1,280/oz. Much depends on how long the platinum price stays below $1,300/oz and whether or not the Rand weakens further relative to the US dollar. It appears likely that there will have to be some mine restructuring within the industry in 2015.
Sustaining capital for replacement shafts and access remains a significant constraint on future supply in our view. A modest view on global growth and constrained supply leads us to be optimistic on medium and long term metal prices, with a desire to avoid hedging as we come into production in Q4 2015 and ramp up to 2017. The equity financing closed on December 31, 2014 provides the Company with the ability to avoid lender-required hedges.
The Palladium Market
The palladium market is dominated on the demand side by auto catalyst usage. Asian small gasoline engine demand has been a growing demand segment for the palladium market.
The palladium market supply deficit continues to widen. SFA (Oxford) forecasts a supply deficit of 1.75 million ounces for 2014, excluding producer stock sales and ETF allocations. Global ETFs absorbed a net 770 thousand ounces of additional metal in 2014 alone, with a new Absa and Standard Bank ETF product in South Africa collectively accumulating 1.14 million ounces since March 2014. Prices peaked at $910/oz on the first of September, but along with a commodity-wide sell off as the US dollar strengthened, prices have since fallen to around $750/oz. Above-ground stocks are available with SFA (Oxford) estimating approximately 6 million ounces of liquid stock. Fundamentals for palladium remain attractive as stocks continue to be drawn down by strong automotive demand and prices are expected to appreciate as market liquidity tightens.
Again, similar to platinum with a modest view of global growth, the palladium market looks tight. We are uncertain on the run down of Russian central bank stocks of palladium, and the current stress on the Ruble adds to a level of concern. On balance however we remain positive on the market for 2015 to 2017 and longer term. We currently have no plans to hedge palladium.
Palladium is particularly important to our large Waterberg deposit and in the time frame of 2018 to 2020 and beyond we believe that the growth of auto ownership in Africa as well as in China, India and other Asian countries provides reasons to be optimistic on palladium prices.
Rand/US Dollar Exchange Rate
The single most sensitive factor in our business is the US Dollar versus South African Rand exchange rate. Since our projects have a diversified metals suite of 8 payable metals, individual metal price fluctuations are not normally as influential to our business as the South African Rand exchange rate. In general our view is that South Africa will remain as a cornerstone of the growing 300 million person emerging middle class in South Africa and will continue to have strong banking and government institutions that are respected for their fiscal prudence. South Africa will be a primary supplier and business hub for the emerging African middle class. However, we believe the current account balance and the capital requirements of government funded infrastructure will keep the Rand from significant strength. This is helpful for our business since our costs are in Rand and our product is priced in US Dollars. Our strategy will be to move a proportion of our US Dollar denominated offering completed in December 2014 into Rand for the next three to six months of construction costs to reduce currency risk exposure while at the same time holding a reasonable US Dollar balance of cash on hand as mitigation against a possibly weaker Rand or to be converted to Rand in the event that exchange rate volatility provides an opportunity with Rand exchange rates weaker than today.