London - Two of South Africa’s biggest fund managers are going against the tide in the platinum market by betting on higher prices.
The metal fell into a bear market this month and US money managers have cut bullish bets for 10 straight weeks, the longest stretch in at least a decade. That hasn’t dented Coronation Asset Management and Investec Asset Management’s view that a long-term supply crunch in South Africa, which produces 70 percent the world’s platinum, will boost prices.
After a 40 percent price drop in the past half-decade, South African producers have slashed investment in future output to stay in business. Consultant SFA Oxford and miner Northam Platinum expect supply from southern Africa’s existing mines to halve by 2030. At the same time, stockpiles held by investors, miners and end users, which along with recycled metal have helped feed demand during several years of production shortfalls, are also shrinking.
“A supply cliff is approaching so we see substantial deficits in the years ahead, and much higher platinum-group prices as a result,” John Biccard, a Cape Town-based fund manager at Investec, said by phone. “Given that deep mine shafts in South Africa may take up to a decade to build, we don’t expect a quick remedy to the situation.”
The rout in prices has forced companies to shutter mines and raise cash to survive. Anglo American Platinum, Impala Platinum Holdings and Lonmin, the top three producers, cut capital expenditure by more than 40 percent in the past five years to 8.9 billion rand ($637 million), financial statements show.
Output falling
Annual production in South Africa and number 3 producer Zimbabwe will drop to 2.1 million ounces by 2030, down from a peak of 5.2 million ounces a decade ago, according to SFA and Johannesburg-based Northam.
Coronation, which invests in the metal mainly through equities, said it boosted its platinum exposure “significantly” last year, when Impala and Northam raised cash through share sales. Platinum miners make up 17 percent of Biccard’s 5.8 billion rand Investec Value Fund, which has beaten 81 percent of rivals in the past three years, according to Bloomberg data.
For now, bears have the upper hand. Speculators cut their net-long position in US futures by 86 percent since August 9 to the lowest this year as expectations for higher US interest rates curbed the appeal of owning precious metals. Holdings in platinum-backed exchange-traded funds are about 3 percent above a three-year low.
“Investors will likely stay away from platinum if US rates go up and the overall demand outlook is weaker,” said Georgette Boele, an analyst at ABN Amro Bank in Amsterdam. She sees prices dropping to $850 an ounce at the end of June, compared with $965.71 now.
Demand for electric cars also poses a risk to platinum, which is mainly used in devices that curb pollution in gasoline- and diesel-powered vehicles. By 2040, about a third of all light vehicles sold will be electric, equivalent to 41 million cars and about 60 times the amount this year, according to Bloomberg New Energy Finance.
Even Terence Goodlace, the chief executive officer of Impala, admits industry warnings about a supply crunch have so far done little to boost prices.
That’s because while safety stoppages, power blackouts and labor protests helped cause annual supply shortages since 2012, there’s enough metal held above ground to satisfy demand. During an unprecedented five-month mine strike in 2014, prices barely moved.
“You can say we’re the the boy who cried wolf - until the wolf bites you,” said Johan Theron, a spokesman for Johannesburg-based Impala.
The hoard held in vaults to factories is shrinking. Above-ground stockpiles fell by about half since 2012 to 1.88 million ounces, data compiled by SFA for the World Platinum Investment Council show.
Plunging output will eventually boost prices, said Neill Young, a fund manager at Coronation, which manages $44 billion and has 8 percent of its equities in platinum-related stocks, compared with about 2 percent of an index average.
“Exactly when it happens is quite difficult to call,” Young said. “In time, there will be an increasingly realisation that the market is in fundamental deficit.”
South African mine production has fallen about 4 percent since 2013, SFA estimates. There will probably be more mine closures because companies haven’t made enough long-term investment, according to Natixis SA, which sees prices averaging $1,320 in 2018, about 37 percent more than now.
“Every single company has cut capital,” Impala’s Goodlace said in an interview. “ Supply will inevitably drop off towards the end of this decade, and quite dramatically after that. I think the market has missed this.”
BLOOMBERG