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The Sprott Inc. family of funds has been buffeted by weak precious metals markets of late, but manager Eric Sprott has a new investment theme with ample support from institutional research: platinum. Mr. Sprott believes that upcoming production cuts, combined with growing demand for autos, will see platinum prices soar to 2007 highs near $2,200 (U.S.), almost 40 per cent higher than current levels.
As a commodity, platinum is an interesting hybrid. Rare and shiny like a precious metal it also has a specific and widespread industrial purpose: catalytic converters to reduce carbon dioxide emissions from auto exhausts.
The platinum spot price has fallen $300 (U.S.) per ounce since September, 2011, to the current level near $1,575. The decline in price has left the world's dominant producer, Anglo American Platinum Ltd., with excess production. In response, the company is expected to shutter at least one major mine to reduce supply. Mr. Sprott believes this sets the stage for higher commodity prices:
"We can't imagine a more bullish case for platinum and palladium prices in the near term. With auto catalyst demand increasing in 2013 and supply dwindling from all sources, we do not expect industrial users will treat these new developments lightly. As there are no substitutes for the function of platinum and palladium in a car, automobile manufacturers may soon be forced to pay much higher prices."
Credit Suisse analyst Nihal Shah agrees with the bullish outlook. He expects platinum demand to exceed supply by between 200,000 and 400,000 ounces in 2013 – depending on the extent of Anglo's production cuts. Mr. Shah projects a commodity price of $1,680 this year and $1,800 in 2014.
While we wouldn't recommend a huge portfolio weighting in this theme, investors can participate in any appreciation of the commodity price through the U.S.-traded ETFS Physical Platinum Shares or the E-TRACS UBS Long Platinum Total Return products. For mining stocks in the sector, Credit Suisse recommends Lonmin PLC.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow