No sign of life yet in PGMs despite industry restructuring
Fri July 26 2024
IT is three years since the bubble in platinum group metal (PGM) prices began to deflate. Back in June 2021, rhodium was trading at over $20,000 per ounce. It’s now at $4,650/oz. Palladium, which is larger than rhodium in terms of supply, has fallen in similar fashion.
On reflection, South African miners were slow to react. The first cost-cutting was only in the third quarter last year after Sibanye-Stillwater wrote down R20bn in assets, half of which was for its Stillwater mine in the US. Stillwater, which accounts for 420,000 ounces annually in palladium output, is still operating. But it might not for long.
Sibanye-Stillwater CEO Neal Froneman said in June that he was ready to close Stillwater despite the awkward optics of taking that step. Cutting US jobs while trying to fund the new Rhyolite Ridge lithium/boron project in Nevada, using US government subsidies, is not a good look for Sibanye-Stillwater. But if the asset is bleeding cash what choice does the company have?
Similarly pushed into cost-cutting, Impala Platinum (Implats) and Anglo American Platinum (Amplats) have announced restructuring affecting between 10,000 to 15,000 jobs in the South African PGM sector.
All in all, South African PGM miners have announced cuts totalling 500,000 oz in production over the next five years, according to UK research consultancy Metals Focus.
Wilma Swarts, PGM research director for Metals Focus says the production cuts could end up being much higher — three times higher, in fact. “From our assessment, the rapid decline in spot prices and the current and anticipated cost-cutting measures are not fully reflected in the mine plans,” she says. It’s worth remembering that mine plans are perforce statements of possibility.
While slashing primary metal production is something of a sticking plaster over market ills — producers recognise that stimulating demand is the best way of creating a more stable and sustainable market — there are signs the worst may be over for PGMs.
Prices have flattened since January and even pulsed higher, as in the case of palladium, which successfully tested $1,000/oz this month after falling to as low as $953/oz. “PGM prices for the quarter were at slightly higher levels than in the previous quarter, supporting the market view that the bottom of the market has passed,” said Tharisa CEO Phoevos Pouroulis in the firm’s second-quarter production report, published this month.
Pouroulis is not the only executive sounding moderately cautious. There are whispers elsewhere of recovery, though, as Amplats CEO Craig Miller said last month, the market will remain volatile.
So, what can the market expect when PGM producers report their numbers, which kicked off on Monday (July 21) with Amplats? “Mixed at best” explains it, according to Standard Bank Group Securities analyst Adrian Hammond.
Sibanye-Stillwater and Implats may unveil plans for further restructuring; but Northam Platinum will follow Amplats in reporting positive cash flow.
Given the uneven nature of performance, investors should remain on the sidelines, says Hammond. “We remain underweight the sector until such time as we begin to see ‘real’ green flags or leading indicators”.
Market disconnect?
Throughout the downturn in PGMs, there has been a growing desperation for metal prices to respond to supply and demand numbers for the metals. “Fundamentals show that the metals are in deficit,” said Froneman at the London Indaba in June. “It is not long now before we will see a pop in the price,” he added.
It’s true that platinum is in a supply deficit; it is estimated by the World Platinum Investment Council to total 476,000 oz this year, compared with an 878,000 oz deficit in 2023. Palladium is also edging into deficit territory. But the market is not taking these figures on board as yet. That’s because the traditional supply-demand drivers are less impactful than conventional wisdom suggests, says Nedbank Securities analyst Arnold van Graan.
Van Graan says there’s a major disconnect between spot market price gyrations and what’s happening in the physical market of supply and demand.
First, the growth in the futures market — especially in platinum, which now accounts for 90% of physical volumes, from only 10% in 2008. This has increased the role of sentiment in price setting.
Second, the price of long-term contracts, which account for 70% to 80% of South African volumes, is settled using the spot price. “We believe this often leads to a disconnect between PGM prices and medium- to long-term supply-demand fundamentals,” says Van Graan. “It seems that the disconnect between fundamentals and spot prices sometimes prevails for extended periods.”
Gone are the days when market balances were used as a guide to call the changes in PGM prices, says Van Graan. “However, one metric that stood out throughout this analysis was autocatalyst demand. Vehicle sales [will] continue to have a material impact on PGM prices, in our opinion,” he says.
Carmakers, which make up more than half of end-user PGM demand, are still destocking, while the direction of car sales remains hazy at best. The industry was counting on the growth of battery electric vehicle demand decelerating this year. Demand has in fact slowed — growth in unit sales has fallen from 12% in the year to date in April to 7% in the year to date in May — but offtake of hybrid EV vehicles, which use some PGMs, has also been disappointingly subdued.
“Despite room to replenish dealer inventories in the US, sales have started to slow,” says Hammond. Sales growth of internal combustion engine cars, the largest end user for PGMs, have been stable at 4% in the year to date.
Source: https://www.miningmx.com/