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Producers can’t cut back fast enough to offset a glut

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Like most metals, platinum group metals (PGMs) have seen a sharp supply-side response to falling prices and deteriorating automotive demand.

In the past year there have been two distinct stories in the platinum group metals market. Razor-sharp fundamentals pushed platinum to a record $2,276 per troy ounce in March last year, but the global financial crisis and the collapse of the domestic auto industry resulted in demand falling precipitously, and by late October platinum prices had plunged nearly 68 percent to $732 per ounce. The picture was similar for both palladium and rhodium.

On top of that, the credit crunch and increased risk-aversion forced investors into a massive sell-off of platinum group metals. The impact on supply-side consumption was dramatic.

"In the (second half of 2008) people panicked and the funds looked to liquidate anything and everything that had cash value," one New Jersey-based platinum group metals trader said.

Platinum group metals are most commonly used in automotive catalytic converters, followed by catalysts for various industrial processes. Because of the slowdown in the auto sector and falling prices for the metals, there has been a significant supply-side response.

Johnson Matthey Plc, a London-based metals refiner, said its platinum output declined by about 275,000 ounces to 6.28 million ounces in 2008. South Africa, the world's largest source of platinum group metals, registered the biggest hit, with output down 250,000 ounces to 4.78 million ounces. North American and Zimbabwean platinum supplies increased slightly, the company said.

"Should the present economic crisis continue, platinum could trade as low as $700 per ounce during (the first half of 2009) if investors shun commodities," Johnson Matthey said in a report. "Conversely, if appetite for risk returns, the price will more closely reflect fundamentals and platinum could trade as high as $1,400 within this period."

Global palladium supplies fell by 2.5 percent to 7.51 million ounces, mainly due to lower sales from Russia. Palladium followed the trend of other precious metals, peaking at $588 per ounce in March before heavy fund sales drove it to a low of $199 later in the year.

Ian Farmer, chief operating officer of London-based Lonmin Plc, said that platinum group metal prices remain below the cash cost of production for many in the industry, which is forcing action by producers. "We anticipate a decline in investment in the industry in the short term," he said. "This could include shaft closures, resulting in reduction or deferment in the supply of PGMs, but this will increase the possibility of a rebound in pricing once sentiment and markets improve."

The company announced late last year that it would put a number of its mines on care and maintenance as it looked for ways to improve its operational performance, given the high cost of platinum production, and would lay off as many at 5,500 workers at the Limpopo and Marikana operations in South Africa.

South African miner Aquarius Platinum said in December that it would shut its Everest Mine in South Africa due to geological-related technical problems and the low platinum price. The company laid off 1,950 people, the majority of the Everest work force.

Anglo Platinum Ltd., Johannesburg, South Africa, the world's largest producer, cut its expenditure plans by as much as 30 percent.

In North America, Stillwater Mining Co., Billings, Mont., announced in November that it would lay off 370 workers, or nearly 21 percent of its 1,770 employees. The company expects to produce 345,000 to 370,000 ounces of platinum group metals at the Stillwater Mine this year and 105,000 to 120,000 ounces at the East Boulder Mine.

MMC Norilsk Nickel, Moscow, is the majority shareholder in Stillwater Mining. The Russian miner said its platinum output fell to 625,000 ounces last year from a planned 720,000 ounces, and expects output of about 600,000 ounces in 2009.

In October, North American Palladium Ltd., which produces about 4 percent of the global supply of palladium, placed its Lac des Iles Mine in Thunder Bay, Ontario, on care and maintenance due to the effect of adverse market conditions on global commodity prices. "The temporary closure of the mine will allow us to conserve cash and focus on strategic initiatives that we believe will help enhance shareholder value over the long term while we wait for metal prices to recover," William Biggar, the company's president and chief executive officer, said.

But even with the supply cuts, most analysts are still forecasting a global surplus this year. JPMorgan Chase & Co. has forecast a 2009 platinum surplus of 750,000 ounces, while RBC Capital Markets Corp. anticipates a 1-million-ounce surplus.

"The supply-side response is not fully developed yet because we have only been in this environment for a few months now," a second platinum group metals trader said. "People were surprised by the depth of the economic slowdown, especially toward the end of last year. But it's not a quick process to close a shaft or an open pit. The response is always slower than change in the demand side."

South African investment bank Investec Ltd. expects platinum prices to average $970 per ounce this year and $1,350 in 2010, while palladium is forecast to average $220 per ounce this year and $250 in 2010.

"We see downside risk to the platinum price in the near-term, particularly if vehicle sales continue to decline in the first few months of 2009," Investec analyst Rebecca O'Dwyer said in a research note. Tom Jennemann


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