Rick Rule: Platinum, Palladium Supply Squeeze Will Turn Ugly

April 07, 2014



"The strike itself is a result of the fact that the industry does not earn enough at current platinum and palladium prices. So the miners can’t earn a living wage. Both sides are stuck between a rock and a hard place.

"There are two competing unions vying for the affections of workers. Neither of these can change the underlying economics of platinum production. In fact, both probably view the workers as tools to a political end, rather than a constituency to be served.

"The strikes are really an illustration of the industry itself. If platinum and palladium prices do not rise, mines will close down and workers will be unemployed. There is no way to maintain production rates without sustaining capital investments, but you can’t make those investments without being profitable. Thus, the price has to go up to maintain current production."

Will Platinum And Palladium Prices Rise?

"Remember that platinum and palladium deliver a high utility to users. They are primarily responsible for purifying the air from motor exhaust of most of the pollutants that threaten air quality.

"So far, the price increase has been entirely due to supply constraints. Demand has been steady because of a lackluster recovery. If in addition to a supply squeeze, we experience a recovery of demand, the impact on the price of the metals could be dramatic. I believe it’s a matter of “when,” not “if” that happens.

"In the short term, prices could come down slightly. The mining industry and industrial users of the metals probably saw the strikes in South Africa coming and stockpiled ample inventories for their near-term uses, so the production loss today will not have an impact on supply for a while, which could temper investors’ fears.

"Nonetheless, I believe the loss of production, which so far is over 550,000 ounces, will be felt in the intermediate term, say, several months from now. This is because producers will fail to make up for the lost production once work resumes at these mines, creating a shortage further down the road."

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