Platinum: The short-term price drop is an opportunity

8 Oct 2014 by Jim Fickett.

The supply of platinum is mostly from new mining, and the current price (about $1270/oz) is far below what it costs to mine the metal (about $1700/oz). The short-term price drop is driven by traders who do not look ahead, in reaction to poor economic news out of Europe. This will pass, and I have added to my position.

Mining cost

There is an in-depth analysis of mining costs, still applicable, in the Dec 2012 post Platinum mining costs are likely to drive the long-term price moderately higher. The main conclusion there was

For a significant fraction of platinum mines, market prices below $1500/oz fail to cover cash costs, and below $1700/oz fail to cover cash costs plus capex. The cost increases of recent years were not a temporary aberration. Therefore the current platinum price of about $1600, while not a screaming bargain, is on the low side

That statement must be qualified with a comment on exchange rates, since costs are mostly incurred in South African Rand and the international market in platinum is priced in dollars. Part of the reason the platinum price is currently low is that that the dollar is high.

The rand has decreased in value over the last few years; I am assuming that costs in rand have adjusted. The dollar has been up and down. Taking into account a ten-year history of the dollar's value against a trade-weighted basket of currencies, it is probably reasonable to replace that $1700/oz all-in cost with a range of $1600-$1800 and say that in the long run the platinum price will need to exceed $1600/oz.

Long-term supply and demand

One should also ask if there are any major trend changes in demand. Johnson-Matthey no longer make their market analysis freely available, unfortunately. However they do still provide freely both (1) their archived reports (full reports and summary tables), and (2) a high-level summary of recent supply and demand. Putting together several of these sources gives the following:

(The way recycling was counted changed in 2005. Before 2005 recycling only included the recycling of auto catalysts, while industrial recycling was netted out of demand. After 2005 both were included in the recycling number.)

I have lumped together the two main sources of demand that follow the business cycle, namely auto catalysts and industrial process catalysts, and have also lumped together the two main sources of demand that tend to react most strongly to the price, namely jewelry and investment. Clearly demand is somewhat volatile. Just as clearly, demand has stayed close to supply for a long time, and will probably continue to do so. In other words, the cost of mining will drive the market price.

Inventories could allow irrational prices to persist for some time

Markets can remain irrational for extended periods. Johnson Matthey predicts this year's deficit will be about 1.2 million ounces. According to a recent issue of the Citi Metals Weekly, above ground stocks of platinum total about 6 million ounces. So the market could remain in deficit for some time and still function. Nevertheless, as inventories fall, more people will notice the opportunity, and eventually the market will turn. Most analysts who are familiar with the platinum market expect a significantly higher price next year.

The long-term price history suggests there is a margin of safety

Looking at the price history over several decades (last analyzed in All precious metals are down, but only one is obviously cheap) shows that the current price of platinum is about 20% above its (inflation-adjusted) 40-year average. Since mining costs have risen, the price should be somewhat above the long-term average. This suggests that, given natural volatility in the market, there is some margin of safety in the current price, simply from the point of view of the price history.

Timing a purchase

The price has been dropping for several months. It could go lower still. But the current price is a real bargain already. I put another 2% of the portfolio in the exchange traded fund PPLT today.