Platinum group metals have hit fresh multi-month highs on continuing worries about supply disruptions in South Africa, with some analysts saying the rally could last a while since the labour unrest likely won't be resolved quickly and may even spread.
As of 10:48 a.m. ET, platinum for October delivery was $11 higher to $1,518.80 (U.S.) an ounce on the New York Mercantile Exchange. The contract peaked overnight at $1,530.60 an ounce, its strongest level since May 8. Sister metal palladium, basis the September contract, was up $3.75 to $627.95 an ounce. It got as high as $634.70, its loftiest level since June 19.
"We are seeing a response to supply-side concerns," said Bart Melek, director of commodity strategy with TD Securities.
At the high, platinum had gained 9.6 per cent since the close one week ago, with the surge starting in earnest Thursday when South African police–claiming self defence–opened fire on striking workers at Lonmin's Marikana mine, killing 34. Production there has been shut down.
Any supply issues in South Africa can have a dramatic impact on the platinum market, since the country provides some three-quarters of the world's supply. Lonmin is the world's third-largest producer and investment banks report that the Marikana mine alone accounts for some 12 per cent of global output. And now, analysts said, there are worries about labour unrest spreading to other companies.
"We feel we are going to get more slowdowns and stoppages," Melek said.
Already, there are signs of potential trouble spots elsewhere. According to news reports, No. 1 producer Anglo American Platinum has received a demand from South African workers for higher pay, plus there were reports of a protest at a Royal Bafokeng Platinum site.
This comes at a time when producers have already been crimped by lower prices. Platinum and palladium, as well as other industrial metals such copper and aluminum, are well down from their highs earlier in the year as markets factored in softer global economic conditions, in turn weighing on future demand expectations.
Low PGM prices compared to previous years means companies are not expanding or upgrading operations to the extent that they might have otherwise, said Carlos Sanchez, director of asset management with CPM Group. This means less future supply. Low prices also mean less money for companies to grant pay raises, which presumably could exacerbate the labour problems.
"The supply outlook isn't looking great," Melek said. "Meanwhile, demand is starting to stabilize somewhat. That combination makes platinum and palladium a lot more resilient than other metals."
Further, there are expectations that it will be some time before Lonmin can finally return to full production, Sanchez and Melek said. As of earlier this week, news reports said only a third of the workers had returned Marikana, in large part due to safety worries. The number declined Wednesday, reports said.
"The expectation is that output won't really begin to move back to normal for at least three or four weeks," Sanchez said. In the meantime, the company may lose 10,000 to 15,000 ounces of platinum output per week, he continued.
A U.S. trader said that the supply issues in South Africa have enabled PGMs to decouple from other markets. Platinum was higher early Wednesday even when stock-index futures, crude oil and the euro were lower. Often, in the absence of major PGM-specific news, platinum and palladium will follow these other markets as they react to risk sentiment and perceived prospects about the strength of the economy.
"You probably have some room for further upside," Sanchez said about platinum. "I wouldn't be surprised to see a move closer to $1,600 before we see an end to the rally."
Melek said the rally could well last into the fourth quarter, although there could be some volatility. For instance, there could be price pullbacks if the Federal Reserve were to disappoint the market and not signal any further monetary easing over the coming weeks or if European officials should not come up with any measures to help debt-plagued nations.
"It will be choppy for those reasons," Melek said, but adding that he anticipates a move higher over the longer term. "As demand recovers, the supply issues will become so much more relevant to the price."