Mitsubishi Corporation International (MCI) says in its latest precious metals update that it expects South Africa’s platinum supply to reduce by around 7%, or by between 200 000 oz and 300 000 oz, in light of closed operations during South Africa’s 21-day national lockdown.
The announcement by government that it will be forcing almost all mining operations to close down has led to a surge in buying interest across the platinum group metals complex, which led to the platinum forward market moving into backwardation for the first time in more than a decade.
As at March 27, platinum’s backwardation exceeds that of its sister metal, palladium, which is an unusual situation, given that the platinum market is adequately supplied with previous years' surpluses, while palladium has been in a structural deficit for more than eight years.
MCI in its report says that while the mine shutdowns have the potential to move the platinum market into deficit this year, it must be considered that the global automotive market is also being severely affected by Covid-19 lockdowns globally.
In Europe, diesel car sales dropped by 8% in February alone; however, a drop in sales to the tune of 80% or more is likely going forward.
Such a drop in automotive sales could remove 500 000 oz from platinum demand and effectively keep the market in surplus.
MCI mentions that turnover of platinum on the Shanghai Gold Exchange has spiked upwards as the country begins to normalise after its Covid-19 lockdown.
“For now, platinum investors are scrambling to get their hands on platinum ingots, which is pushing this form of the metal into a premium against sponge, the powdered form of the metal used by industry.
“The speculative nature of the squeeze suggests it will be short term; however, everything hinges on how quickly mine production can resume in South Africa and whether other countries’ mining and refining operations will be closed.
"What appears clear, given the uncertainties on platinum supply and demand right now, is that it will be a volatile time for both prices and forward/lease rates,” says MCI.
Palladium has staged its own remarkable recovery: after plunging to six-month lows of under $1 500/oz last week on fears to global growth amid the Covid-19 pandemic, it has surged by more than $800/oz as supply concerns return to the fore.
Palladium’s V-shaped recovery is further evidence that the market remains structurally undersupplied and susceptible in the short term to both fears of lower demand and of lower supplies.
MCI believes the sell-off earlier this month was overdone and was likely exacerbated by speculative investors having to cash out platinum holdings to make up for losses in other markets, particularly equities.
The roots of this week’s rally were in the extraordinary fiscal stimulus measures being enacted in the US and elsewhere, and the shutdown announcement in South Africa. Physical purchasing by industrial users also played its part as buyers looked to lock in attractive prices.
Though South Africa is responsible for less than 40% of primary mined palladium supply, closure of its mines for at least three weeks will impact on an already tight palladium market.
“We can expect lost output of around 200 000 oz in a ten-million-ounce market, which will affect material availability at the margins, but the impact on sentiment and the potential for ongoing disruption is far greater.
“Add to that the difficulty in transporting spent catalyst material amid various national shutdowns, plus the potential that mine and refinery closures may extend to other regions, and palladium’s tightness is unlikely to disappear any time soon,” MCI reports.
Rhodium prices swung from $14 000/oz in the traded market down to $4 000/oz, only to shoot back up to almost $11 000/oz in the space of just a few days, MCI points out.
It adds that rhodium has displayed a similar move to its sister metals platinum and palladium, but more extreme. The brutal sell-off came as the outlook for the global auto industry looked ever more bleak amid the coronavirus crisis, and with limited buying interest, prices dropped like a stone in the first half of this month.
The week of March 27 saw a complete about-turn as industrial users and speculators alike are nervous of the supply interruptions from South Africa, which supplies more than 80% of global newly mined metal.
Rhodium has returned again to well over $10 000/oz. With refining lead times in rhodium already stretched owing to the coronavirus and a build-up of unprocessed material, the outlook for this thin, relatively illiquid market is for metal availability to remain very tight.
Amid the extreme price swings in PGMs, it is easy to forget that the US has just passed an era-defining stimulus package that dwarves the 2008 measures, and the Federal Reserve System has committed to do “whatever it takes” to protect the economy – the impact of this is largely positive for gold, notes MCI.
Gold prices fell sharply in mid-March as the dollar absorbed much of the safe haven interest amid the worsening coronavirus pandemic. After falling to 4-month lows at $1 450/oz, bullion staged a strong recovery to the $1 600/oz level on expectations of massive fiscal spending and the Federal Reserve System’s commitment to unlimited monetary stimulus.
The $2-trillion US stimulus package bodes positive for gold in the short term by weakening the dollar and pushing real interest rates into negative territory, thus supporting non-yielding assets.
In the medium to longer term, MCI notes that it raises expectations of inflation and brings the possibility of further monetary stimulus in the form of interest rate cuts.
For now, gold looks set to continue to benefit as a go-to safe haven asset.
Silver prices collapsed to 11-year lows in mid-March as the coronavirus-related slowdown was priced in. Silver clawed back some of its losses this week as it followed gold higher amid fiscal stimulus measures in the US.
MCI explains that silver lost close to a third of its value in a brutal downwards move that began two weeks ago.
After plunging to intraday lows of under $12/oz, the lowest since 2009, silver subsequently experienced a limited recovery on bargain-hunting investment and a more positive macro environment as the US unveiled an unprecedented stimulus plan.
“This allowed silver to recapture some ground against gold, having recently reached an all-time low of 120th of the price of gold. Amid all this, physical investor interest has remained strong - as evidenced by recent buying into exchange traded funds – and industrial demand, particularly in the chemical and medical space, has been robust.”