Monday, April 14, 2014

Platinum Rallies on Supply Fears Amid South African Mine-Worker Strike

By Tatyana Shumsky

Platinum prices have rallied as a mine-worker strike in South Africa and sanctions against Russia stoke worries about supplies of the metal.

Platinum for July delivery, the most actively traded contract for the metal on the New York Mercantile Exchange, has gained 6.3% this year, ending Friday's trade at $1,462.60 a troy ounce, the highest price since March 17.

Disruptions in the two countries that together produce most of the world's platinum could lead to additional costs for auto makers if the metal becomes scarce. Platinum is used primarily in catalytic converters of diesel-burning vehicles, which are common in Europe.

Platinum mining in South Africa has ground to a halt since the Association of Mineworkers and Construction Union went on strike on Jan. 23 to demand higher pay. Mining companies had built up their inventories before the strike, but those stockpiles have dwindled as the strike stretches into its 11th week, analysts said.

"This strike has teeth in it.... Now you have to worry about depleting inventories because the mining companies have obligations to deliver metal to their clients," said Philip Gotthelf, president of Equidex Inc., a Closter, N.J.- based commodities investment-management firm.

South Africa is the source of roughly 80% of the world's platinum. Entry-level mine workers earn about $500 a month there, and the union wants that raised to about $1,200 a month.

Platinum producers have so far resisted the union's calls, citing cost pressures and instead offering a 9% wage increase.

Total production losses from the strike are about 10% of estimated world mine output this year, based on a forecast provided by HSBC.

Adding to the supply worries are Western sanctions against Russia in response to Moscow's pressure on Ukraine. Russia is the second-largest platinum producer, although its output is less than one-fifth of South Africa's.

While the sanctions haven't targeted platinum specifically, the European Union plans to discuss new measures against Russia on Monday.

"There's concern that [sanctions] might disrupt supply," said Howard Wen, a precious-metals analyst with HSBC.

The continued production disruptions are likely to exacerbate the supply shortfall in the global platinum market, said James Steel, an analyst with HSBC, in a report. Mr. Steel expects platinum supply to total 5.695 million ounces in 2014, well behind expected demand of 6.364 million ounces. The resulting supply deficit could lift platinum prices to an average of $1,595 an ounce, Mr. Steel said.

Catherine Raw, co-manager of BlackRock Inc.'s$8 billionWorld Mining Fund, said she sees investment opportunities in the sector.

"If we continue to see a lack of production, we think we'll see some platinum price movement," Ms. Raw said.

BlackRock is holding shares of a platinum exchange-traded fund to take advantage of price gains rather than investing in the stocks of individual platinum miners because their profits are likely being dented by the strike, Ms. Raw said.

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