Platinum Investors Are Finally Taking
Note of South Africa’s Power Problems

Heraeus Precious Metal, the world's largest recycler and trader of precious metals, comments on recent developments in the Platinum industry.

South African platinum production could struggle to hit 4.1 moz this year. Output of 4.1 moz was estimated including some disruption due to the difficulties caused by the power curtailments. This included processing of some of the stocks that have been built up.

However, there is a risk that more severe power cuts during the Southern Hemisphere winter will reduce productivity, and refined output could fall short as the stocks are not able to be processed.

Platinum output from South Africa hit by unreliable power supply in Q1’23. Eskom has struggled to provide sufficient electricity to meet demand as breakdowns reduced the available power plants. PGM mining companies are now reporting the impacts on their Q1’23 production. The lack of reliable power has compounded other operational problems and caused a build-up of part-processed material.

Impala Platinum reported that about 16 koz 6E (platinum, palladium, rhodium, iridium, ruthenium, gold) was unable to be refined and increased excess inventory to 190 koz 6E (~100 koz Pt) during the first quarter.

Total PGM production was down 10% at 662 koz 6E (299 koz Pt). Anglo American Platinum reported total 6E production fell by 6% to 901 koz in Q1’23, with a 6% drop in platinum output to 417 koz. Anglo also noted an increase in work-in-progress inventory of 26.5 koz 6E owing to the impact of power outages, taking estimated excess inventory to close to 300 koz 6E, of which ~125 koz is platinum. However, Anglo has maintained its refined PGM production guidance of 3.6-4.0 moz with 1.65-1.85 moz of platinum, although this is subject to sufficient power supplies enabling some of the stock to be processed.

Platinum ETFs saw heavy buying at the end of April from South Africa- based funds. Year-to-date regional inflows into platinum funds in South Africa (+333 koz) are the standout when compared to the US (-107 koz), the UK (-18 koz) and Switzerland (-17 koz). Net flows have been positive every month this year so far, as South African investors are more acutely aware of the electricity supply issues being faced by PGM producers.

Total global holdings stand at 3.3 moz, up from 3.0 moz at the beginning of the year, although that was down 1 moz from the peak level of holdings in July 2021.

These investors bought into the recent price rally and hope for more. The platinum price had risen more than 20% since late February before the recent correction. Supply issues in South Africa (~75% of mined supply) are well documented. The regularity and severity of load-shedding in 2022 was unparalleled, with the situation unlikely to improve significantly during 2023. Load-shedding resulted in the build-up of above-ground stocks of unrefined PGMs last year and could lead to an estimated loss of ~250 koz of platinum production this year as the Southern Hemisphere winter begins to bite. Available first-quarter results of major South African PGM miners all cite load-shedding as impacting refined output to some degree.

Market fundamentals look solid. Global autocatalyst demand for platinum is forecast to grow by 14% this year to a six-year high of 3.2 moz. Recovering light-vehicle production, coupled with wider use of gasoline catalytic converters in Europe and China with platinum substituted for some palladium, moves the platinum market into deficit.

Other metrics suggest the top may be in for now. The net long position of non-commercial specs more than doubled to 1.5 moz in the last two weeks of March.

Previous rallies in platinum have stalled with positioning at around this level. Also weighing on platinum is the dollar-rand exchange rate, with which the metal has a good negative correlation (rand weakens, platinum price falls).

Since 2022, there has been a dislocation between the two. To resume the historical relationship could require a correction in the platinum price, given that the weakness in the South African economy makes a rand rally look less plausible. Lastly, and probably the least convincing argument for a lower platinum price, is that seasonality in the white metal suggests that the first six months of the year see the highest prices. Relative underperformance follows, on average.

Although a short-term correction is underway, overall price risk is to the upside. With automotive demand showing strength, the risk of supply underperformance underpins a tight market throughout this year. The price could still have some upside, particularly if the power supply situation worsens in South Africa.

Editor’s Note: Heraeus Precious Metals is a global leader in the precious metals industry. The company is part of the Heraeus Group and covers the value chain from trading to precious metals products to recycling. In addition to gold and silver, it also has extensive expertise in all platinum group metals.