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Platinum is losing it's shine

06/07/2012

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

The structural imbalance between supply and demand has been a favourite theme for those arguing the case for investing in commodities and commodity companies and platinum has been a favourite example.

Few new platinum deposits have been discovered in decades while a line one often hears trotted out is that all the platinum that has ever been mined could fit inside the average family home. Another argument runs that, like gold, only a finite amount exists in the world and nobody is making any more of it.

Unlike gold, however, platinum is not just a pretty precious metal - it also has several industrial uses that have enhanced the demand side of the equation. For example platinum is used in the production of catalytic converters, which has been viewed as something of a perfect storm – after all, not only were more catalytic converters needed because of the growing demand for cars in emerging markets, ever-tighter regulations on emissions were also underpinning demand in the developed world.

As such, the consensus has for some time been that both platinum and the companies that mine it must be compelling investments and their shares hit rich valuations. Consensus may have to be reviewed, however, because on 22 June 2012, a company called Aquarius platinum announced it had put one of its three platinum mines on 'care and maintenance' – essentially mothballing that whole operation.

It said a number of issues, including "the present low platinum price environment", had rendered the mine uneconomic and added: "the board is of the view that the platinum market is in an abiding surplus, with the industry generating nearly half a million ounces of unneeded platinum each year due to the current European economic crisis, among other factors."

Aquarius, whose share price now stands around 50p having been more than eight times that in February last year, expects margins to "remain under sever pressure across the industry" so, while the consensus has been platinum has been benefitting from a positive imbalance in supply and demand, at least one player in the sector has now taken the view any imbalance that does exist is now firmly against it. On one side of the equation are oversupply and falling prices while, on the other, as a hangover from previously rising prices, there is inflation baked into the cost base.

it has been noticed that Citigroup analysts are forecasting the mining industry will expend some $150bn (£96bn) of capital in 2012 so Aquarius’s pretty stark announcement is a timely reminder that no business can ever shake off the realities of the cycle of supply and demand forever. Yes, there can be sometimes very long periods when any imbalance is in your favour, but inevitably it will at some point swing the other way. If companies’ valuations are based on the high levels of profits made in the good times then investors have little protection in share price terms when the good times end.

 

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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