Tony Daltorio: Anyone following how to invest in platinum this year has noticed the importance of South Africa to this metal’s price.
That’s because most of the world’s platinum supplies come from South Africa. The country produces nearly 70% of the world’s platinum and is home to 80% of the world’s reserves.
Both Johnson Matthey’s Platinum 2013 report and Thomson Reuters GFMS’ Platinum and Palladium Survey 2013, released in May, point to South Africa as a growing problem for the global platinum market.
Continued labor unrest in South Africa has created a supply/demand scenario favorable for investing in platinum. While global platinum demand is steady to rising slightly, the labor situation in South Africa is beginning to put a crimp into supplies.
That’s why exchange-traded products such as the ETFS Physical Platinum Shares (NYSEARCA:PPLT) have received the largest investor inflows in eight months.
But it’s not too late to learn how to invest in platinum to bank these profits in 2013, as June looks to make the situation even worse…
How South Africa’s Labor Unrest is Shaping the Platinum Market
Last year there was a small 2.6 million metric ton platinum deficit according to previously mentioned platinum reports. This followed a seven-year period of market surpluses.
The deficit was entirely caused by a 12% drop in South African production of the precious metal.
Now June is set to bring even more trouble to South Africa’s labor fights.
William Tankard, mining research director at GFMS, stated “the pieces are in place for further labor unrest as we move into the wage negotiation period (started in early June) in South Africa.”
The deficit is forecast to grow this year and into 2014.
The problem results from South African mining being very labor-intensive (the mines are very deep underground) with harsh conditions. The mines are deep and hot with lots of dust requiring ventilation systems to keep the air breathable. The mining industry in South Africa does not have a good track record when it comes to safety either.
Production always continued along when the dominant labor union was the National Union of Mineworkers, which is closely tied to the ruling party, the African National Congress.
But at many of the major platinum mines, such as the mine in Marikana owned by Lonmin PLCADR (LNMIY), their membership is dwindling rapidly. Marikana was the site where close to 50 people died last year in clashes and one person has been shot dead this year.
The miners are switching their allegiance to the Association of Mineworkers and Construction Union (AMCU), which is growing very rapidly under the leadership of Salvation Army preacher-turned-union-boss, Joseph Mathunjwa.
The union now represents the majority of lower category workers, with over 100,000 members, in South Africa’s platinum mining industry. The AMCU is particularly powerful in the most troubled platinum mines, such as Marikana.
It has become the trend setter in demands for improved working conditions and demands.
It is believed the AMCU will present demands to the mining companies for wage increases from 15% to as much as 60% in the current round of wage negotiations.
The platinum mining companies consider these demands as ridiculous considering the financial condition the industry is in. The cash flow return on operating assets for the five largest South African platinum companies last year was a terrible -0.6%, the worst level since 1992.
According to Rick Rule of Sprott Holdings, the industry “does not meet its cost of capital.” In addition, Rule says “More than half the shafts are loss making.”
This is the backdrop behind the biggest platinum miner, Anglo American Platinum Ltd.(AGPPY), cutting 6,000 jobs earlier this year. It had wanted to cut 14,000 jobs but was talked out of it by the government.
But it is highly likely that the struggles of the industry will not stop the demands of Mathunjwa and the AMCU membership.
Mathunjwa recently told foreign investors at a meeting organized by Standard Bank that he believes entry-level workers should have a take-home pay of $800-$1000 a month. This is nearly double the current wage level. It will be nearly impossible for South Africa’s platinum mining firms to meet this demand without forcing the closure of a number of platinum mines with the resultant job losses.
If this occurs, it will translate immediately into lower platinum supplies, a growing deficit in the market, and a higher price for platinum.
With Mathunjwa’s power growing, the trend toward more labor unrest and less platinum mined will continue for at least months, if not years.
The Best Ways to Invest in Platinum
The problems in the South African mining industry have opened the door to a profit opportunity for sharp-eyed investors.
This is especially true at the moment with weakness in all of the precious metals, no matter the fundamentals, due to the gold selloff.
Here are the best ways to go if you’re hunting for how to invest in platinum…
You can go through either the mining companies’ stocks or through exchange-traded products that track the price of the metal itself.
The problem at the moment with investing into platinum mining companies is that most of the major firms – Anglo Platinum, Impala Platinum and Lonmin – are South African companies, which are at the epicenter of the turmoil in the market.
One stock outside of South Africa is Stillwater Mining Co. (NYSE:SWC). This company is the only U.S. producer of platinum and palladium. It mines the precious metals in the geological formation in southern Montana known as the J-M Reef.
That largely leaves investors the choice of exchange traded products. These products are a convenient and cost-effective way to obtain exposure to the future gains expected in platinum prices.
This has not escaped the notice of some investors. ETF Trends reported recently that platinum exchange traded products had the biggest inflows in over eight months on the thought that current wage negotiations in South Africa between platinum mining companies and labor unions will break down.
Foremost among the options available is the ETFS Physical Platinum Shares (NYSEARCA:PPLT). ETF Securities actually holds physical platinum bullion in vaults located in London and Zurich. The expense ratio is a reasonable 0.60%. It has over $825 million in assets and ETF Trends reports that in the latest period it saw inflows of $28 million.
There are also two exchange-traded notes (ETNs) designed to track the performance of platinum.
The first is the iPath Dow Jones-UBS Platinum Subindex Total Return ETN (NYSEARCA:PGM). The second is the ETRACS CMCI Long Platinum Total Return ETN (NYSEARCA:PTM).
The expense ratios are 0.75% and 0.65% respectively. Both ETNs track indices that are designed to match the performance of a futures contract on platinum.
One final way to play the expected rise in the platinum price also holds physical platinum. It is the Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP). As the name implies, it also has physical palladium in its portfolio.
It holds the platinum and palladium bullion in vaults in Canada along with London and Zurich. What is unique here is that unitholders can actually redeem their shares for physical bullion on a monthly basis (25,000 unit minimum on redemptions). Management fees are 0.50%.
Your Guide to Financial Freedom. We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the “flattening of the world” continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet. And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.