What South Africa Means To The Platinum Market (PGM, PPLT, PTM, LPLT, EZA)
Tony Daltorio: Platinum generally receives less attention from investors than other precious metals, but it is rarer than gold or silver. The metal’s physical characteristics have made it important for a wide variety of industrial applications. Its resistance to corrosion, for example, makes it ideal for use in automobile catalytic converters. This use alone accounts for about 50% of its usage. In addition, it used in electronics and fuel cells. The petroleum industry uses it in the cracking process in oil refineries. And of course, platinum is used extensively in jewelry [for more platinum news and analysis subscribe to our free newsletter].
Some platinum is produced as a byproduct of base metal mining with platinum deposits being rather rare. Due to its uniqueness, platinum ore is unevenly distributed and concentrations of it are found in only a couple places on Earth. The two largest platinum producing countries are South Africa and Russia. South Africa is the leader by far, producing roughly 80% of the world’s platinum with 90% of that coming from the Western Bushveld region of the country.
Inside South Africa
So when violence erupted recently at a platinum mine (owned by Lonmin) in that region, it had a tremendous effect on the platinum industry beyond the deaths of 45 people. There was a combination of factors that came together to cause the violence, including poor working conditions (South African mines are very deep and dangerous), low wages and a tug-of-war between two unions, the National Union of Mineworkers and the Association of Mineworkers and Construction Union [see also Three Commodities Ripe With Political Risk].
The problems quickly spread across the industry in South Africa, even causing the world’s largest platinum producer, Anglo Platinum, to halt operations. Anglo Platinum alone produces 45% of the world’s supply of the metal
Labor problems are not the only problems facing South Africa’s platinum industry. Other problems include a volatile South African rand, a slowdown in Europe’s vehicle market, relatively low platinum prices and rapidly rising costs. In addition to labor costs, South Africa platinum producers are facing skyrocketing costs for electricity (the mining is very power intensive), which has been climbing at a 25% annual rate for the past three years.
Most in the industry do not see these problems going away anytime soon in the country. Russia’ Norilsk, one of the few major platinum producer outside South Africa, believes South Africa’s production will decline between 350,000 and 400,000 ounces this year. There is a surplus of platinum right now – 6.5% of total demand – and it may take 12 to 18 months of continued problems in South Africa to clear that surplus. But after that, the industry could be in a period of supply deficits for years to come.
So it should be plain for investors to see that what happens in South Africa will have a tremendous effect on platinum prices, already at multi-month highs. Therefore, a look at some of the exchange-traded funds and notes based on platinum will be well worth investors’ time. There are several from which to choose, including the ETFS Physical Platinum Shares (NYSEARCA:PPLT), the UBS E-TRACS CMCI Long Platinum Total Return ETN (NYSEARCA:PTM) and the iPath Dow Jones – UBS Platinum Subindex Total Return ETN (NYSEARCA:PGM). There is also a leveraged ETN that offers investors two times the gains of platinum itself, the Velocity Shares 2x Long Platinum ETN (NYSEARCA:LPLT) [see also How To Play Peter Schiff’s “Bullion Collapse” Theory].
PPLT is an interesting choice since it is an ETF whose shares represent beneficial interest in a trust which actually holds physical bars of platinum. Investors should bear in mind that ETNs are debt obligations of the bank issuers – UBS, Barclays Bank and Credit Suisse respectively.
Another ETF investors could consider, perhaps on the short side, is the iShares MSCI South Africa Index Fund (NYSEARCA:EZA) which has nearly 20% of its portfolio allocated to the mining industry. The South African economy has already been hit hard by the eurozone crisis, and now strife in the platinum mining sector is making things worse. The sector employs 180,000 people and contributed 82 billion rand in sales last year to the economy, second only to coal. The economic drag from the sector may further pull down the ETF as South Africa’s economy sputters.
Written By Tony Daltorio From CommodityHQ Disclosure: No Positions.
CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.