The Metals Report: Jack, what is behind the predictions that the platinum supply surplus will become a 400,000-ounce (400-Koz) deficit?
Jack Lifton: Anglo American Platinum Ltd. (AMS:JSE), the world's largest platinum and rhodium producer, has taken 400,000 Koz of platinum out of its 2013 schedule for its South African mines. While people might not think 400 Koz is very much, you have to keep in mind that in 2012, the total production of all of the platinum group metals (PGMs) was less than 700 tons. One ton of precious metal has 30,000 or 31,000 troy ounces of material, troy ounces being the traditional measurement in precious metals. That 400-Koz reduction equals 10–13 tons and represents as much as 2% of world production. Global production has been declining from its peak of 320 tons in 2006, and in 2012 was down to 300 tons. This is a serious reduction in a metal that is extremely rare. Officials say this reduction is due to labor costs and unrest, but if it is due simply to declining grades then it portends a bleak future for those who will simply want to wait and see what happens.
South Africa has at least half of the world's PGM resources and reserves and produces 75% of the global total. When South Africa sneezes, the PGM market gets a cold. South Africa is sneezing a lot right now. Production is down, energy costs are up and there is labor unrest. The issue of security of supply has come to the fore for the average investor. Users of PGMs have been watching this develop for several years, as South Africa becomes politically less stable.
It is very hard to find new PGM resources, they are hard to mine and, once the market goes into deficit, it is hard to play catch-up, especially if the deficit is structural, which appears to be the case.
TMR: Byron, is this is a problem of supply due to dwindling grades and labor unrest in South Africa, or is this a demand problem?
Byron King: It's both. We are on the edge of the perfect storm for platinum, palladium and rhodium. Three things are happening. One is what Jack alluded to, the problems in South Africa: massive strikes, workplace violence and mine closures. Two, the Russian PGM stockpiles have hit bottom. Russian PGM exports are as low as they have been since the fall of the Soviet Union. Three, there is the explosive growth of automobiles and trucks worldwide that require catalytic converters. These converters are a huge driver of demand for PGMs. Much of that demand comes from Asia, India, Russia, Africa and Latin America, where automobile sales are rising.
These three things are the trigger for a serious run up in prices.
TMR: You mentioned China as a source for demand, but if the price of PGMs goes up, will there be less demand?
BK: China makes an interesting study for PGM use because many of the vehicles made there do not have catalytic converters. Catalytic converters are a key use for PGMs. Chinese manufacturers just do not want that extra expense. Chinese buyers—especially truck buyers—don't want to pay for a catalytic converter. But this winter, smog enveloped first Northern China, then blew across the country and over to Japan, triggering alarms in the air pollution monitors. A lot of that smog was automotive truck exhaust that had not been filtered through catalytic converters.
China has motorized in the last 20–25 years, but without using catalytic converter technology for a large portion of its vehicle fleet. Now the Chinese are paying the environmental price, and the wheel has to turn toward tighter environmental requirements for catalytic converters, which will drive PGM demand.
JL: The Chinese leadership, in my opinion, is panicked. Beijing is starting to hear the people's dissatisfaction, people who, during the smog alerts this year, could not see more than an arm's length away due to the pollution. In addition to new vehicle production with mandated catalytic converters, the Chinese have to think about retrofitting existing internal combustion-powered vehicles. In addition, jewelry is very important in the Chinese culture. It is a real mark of status. Platinum jewelry is very big in Japan and it is catching on in China. The data are clear: Chinese demand can grow faster than any possible increase in platinum production.