JOHANNESBURG (Business Day) -- The good prospects for platinum are unlikely to change soon. Although the platinum price has consolidated after reaching $1,080/oz in January, a shortage of supply could underpin prices in the future.
Zimbabwe's threat to nationalise its mining industry is certainly not helping to spur investment in that country's platinum industry, which could dent the supply even further.
A key reason to favour platinum is that demand, to a large extent, is driven by tightening global legislation. The world is up in arms about greenhouse-gas emissions and it is encouraging to see the accelerated introduction of fuel-efficient vehicles and the use of low-sulphur fuel.
By 2007 the U.S. will require that exhaust-emission catalysts be fitted to all heavy diesel mobile machinery and trucks. Platinum is an essential component of such catalysts.
China is the third-largest vehicle market in the world and it is estimated that it will have around 50 million vehicles on the road by 2009. China is following Europe closely in implementing emissions legislation.
Not too many of us would buy platinum jewellery for its characteristics as a catalysing agent or a conductor of electricity. Jewellery, however, is a crucial factor for platinum demand. Chinese demand remains the swing factor. A strengthening Chinese currency would support platinum demand and jewellery demand in general.
According to industry players, the affordability threshold for jewellery manufacturers is sitting around $1,000/oz, with the scarcity value of the metal becoming more important.
Economic growth in China has over the past couple of years been driven by fixed investment and not so much by consumer spending. In the long term this trend should change, with the urbanisation of the Chinese consumer becoming the more important driver of growth.
Japan is also showing all the signs of a recovery, which could be a key demand driver for platinum. Japan used to be a 1.5-million-ounce market, but the economic slump during the past decade has trimmed this back to around 550,000 ounces.
The bridal market in Japan is very important, considering that platinum is used in almost 100% of engagement rings and about 80% of wedding rings. In the U.S., the share of platinum in the bridal market has grown from 1% in 1990 to more than 40%.
A large part of the future supply is dependent on the successful development of Zimplats, a key asset of Impala Platinum. Recent noises about the nationalisation of mining assets in Zimbabwe have put this asset at risk.
The quality of the Zimbabwe reserves is such that Impala cannot afford to lose its first-mover advantage on the project.
Looking at the life of this platinum resource, Impala would not have taken only a two- to five-year view when it made this investment.
What the major platinum producers, as well as investors, don't want is the Zimbabwean assets in the hands of inexperienced Chinese producers. In that scenario you face the risk of a flooding of platinum and palladium into the market.
In the short to medium term, the platinum price will find support from the Zimbabwean news flow. One can feel confident that the platinum price has found new support around the $1,000/oz level and that further earnings upgrades could be expected.
Platinum is an industry with exceptionally high barriers to entry and the limited smelting capacity belongs to the major South African producers. Platinum production is proudly South African, delivering almost 80% of global production.
With strong demand prevailing, a strong currency and a higher platinum price are like a natural hedge. Any currency weakness would provide the necessary gearing to offset a likely decline in the dollar platinum price. Further consolidation in the industry is highly probable and would underpin ratings.
Van Schaik is a fund manager at Alphen Asset Management
