Commodities | Mar 19 2010
By Chris Shaw
So far this year platinum prices have risen to levels last seen in August of 2008, helped along by what Barclays Capital notes has been an increasingly supportive demand picture.
Barclays expects prices will continue to build on these gains through 2010, with the supply side of the equation playing an increasingly important role in driving prices.
The main reason for this view is while USGS (US Geological Survey) data suggest platinum group metal reserves are at healthy levels, a significant jump in production on the back of current higher prices is seen as unlikely.
This is largely due to ongoing issues in South Africa, which Barclays notes in 2006 supplied around 80% of global output but has since been dogged by challenges such as power outages and financing issues.
These contributed to 2009 being the first year producers in South Africa faced rising cost pressures, which included a stronger currency, above-inflation wage increases and double-digit hikes in electricity tariffs.
Barclays estimates the weighted average cost of production rose by more than 10% in year-on-year terms, though gains in the platinum price exceeded this by rising 24% in rand terms in 2009. The gain in US dollar terms was more impressive at almost 60%.
According to Barclays, 2010 won't deliver any easing in cost constraints as biennial wage negotiations were settled for one year in many cases and so remain something of an issue. As well, in February Eskom, South Africa's dominant power generator, was granted permission to lift electricity prices by 25%. This will further add to production costs.
After breaching 10,000 rand per ounce last year, Barclays estimates South African producers are now facing a weighted average operating cost of almost 12,000 rand per ounce. With its forecasts of the rand remaining relatively steady against the US dollar in coming months, Barclays suggests higher platinum prices will be needed to cover total costs and encourage new supply.
Aside from the short-term cost issues, Barclays suggests some longer-term structural issues could also hinder supply, as Eskom has cautioned power supply may not be able to keep up with increased demand from as early as 2011. This reflects a lack of investment and ageing production plants.
Most platinum producers have guided to relatively flat production in year-on-year terms, but Barclays suggests the potential for mine safety closures, labour disputes and power issues to disrupt supply implies any supply growth prospects are risky at best.