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PGM prices benefit from South African shutdowns, but gains may be limited

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(Kitco News) - Platinum and palladium are currently benefiting from mine shutdowns in South Africa as part of the global effort to halt the COVID-19 outbreak, but a more meaningful price recovery may not occur until the global economy recovers, some analysts said.

The industrially oriented precious metals – used in automotive catalytic converters – were hammered this month on worries about slowing economic growth due to COVID-19. From the highs to the lows during the month of March so far, Nymex April platinum fell 39%, while June palladium lost 47%.

However, the metals are getting a reprieve from news of three-week mine closures in South Africa. Platinum group metals rose sharply Tuesday, then as of mid-morning Wednesday, Nymex April platinum was up another $24.20 to $725.90 an ounce, while June palladium surged $160.10 to $1,947.

The government of South Africa is shutting down mines in the country starting midnight Thursday, with the exception of coal operations that are needed to meet South Africa’s energy consumption. The unprecedented actions have an especially big impact on the global supply of PGMs. Analysts reported that South Africa provides 70% to 75% of the world’s platinum supply and 40% of what TD Securities calls an “already extremely tight” global palladium supply.

“Platinum and palladium recently found themselves under pressure due to the corona crisis because demand from the automotive industry is falling away,” said Commerzbank analyst Carsten Fritsch. “Now there could also be disruptions on the supply side, however, which has allowed platinum and palladium to make strong gains since yesterday.”

Metals Focus said the South Africa news could lead to purchases by end users and speculative interest in the near term, especially after the recent sell-offs. Otherwise, Metals Focus said the prior sell-off on economic worries was similar to the slide that occurred amid fears of demand destruction during the 2008 financial crisis.

“Back then, the collapse in PGM prices led to a surge in bargain hunting,” Metals Focus said. “This helped both metals to quickly stabilize and then post a decent rebound at a time when worries about a global economic downturn persisted.

“Moving to this year, however, we are skeptical that such large-scale demand will emerge in the very short term, particularly in light of a near-term slump in car sales and supply-chain disruptions. In terms of platinum, leaving aside poor auto-catalyst demand, a steep decline in Chinese jewelry sales and investors’ fatigue to the metal’s prolonged price underperformance will also limit bargain hunting.”

Fritsch estimated that the South African shutdowns may result in lost production of 250,000 platinum ounces and 150,000 ounces of palladium. He added that lost palladium output means the global supply/demand deficit may narrow to 800,000 ounces this year.

Nevertheless, he said, “this will hardly offset the shortfall in demand brought about by coronavirus.” For platinum, the fall in demand may be roughly equal to the lost production. “The current price surge thus appears excessive,” Fritsche added.

BMO Capital Markets issued a research note saying the South African government has clarified its rules related to mining, saying certain essential activities can continue. Also, processing of surface PGM stockpiles will be allowed to continue, BMO said.

“It is worth remembering, however, that the absolute impact on global commodity supply may not be that significant if the lockdown lasts only three weeks,” BMO said. “PGMs are the most geographically concentrated commodities; a three-week shutdown would equate to 4% of annual global supply, and this falls to ~2% for each of chrome and manganese.”

Once the current economic headwinds do abate, Metals Focus still looks for palladium prices to go on to record highs in 2021 due to the ongoing supply deficit.

“By contrast, the expected improvement in platinum prices will be largely dependent on positive spill-overs from gold,” Metals Focus said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.