The ins and outs of investing in platinum. Is the sector showing signs of a turnaround? My fascination with the JSE began at an early age. When I was 13 I lived a double life. As soon as I had shed my school clothes I would sling on a red bag and trudge down to the newspaper depot. I was The Paperboy – and I was useless. On days of rain I would inevitably forget to wrap the paper in plastic. Weary office workers would return home to a mash of pulp and ink. If not that, then, courtesy of the wind, the contents would be strewn around the neighborhood. I didn’t last long in the job. I didn’t care though, I hated it and needed something more lucrative. Maybe then all the girls would like me. Often I would steal the business section, hoping no one would notice. Nobody did, or cared. This began my fascination with the JSE and markets in general… I thought, “here is a chance to make some proper money!” Not R27 a week as The Paperboy. Years later, I continue to search for opportunities. Platinum. What has captured my interest of late is a sub-sector that has been punished over the past few years - platinum. Why is it so beleaguered? And is it showing signs of a turnaround? Now I’m not saying that this is a banker in the short term, but there are certainly some interesting developments: 1) It looks like the rand will weaken further. When Quantitative Easing (QE) begins to taper off, money should move out of SA. Based on what the US Fed Chairman Ben Bernanke has stated, tapering isn’t that far off. This cheap money moved in and strengthened the rand. Once QE begins to wind down some of it should move out, which will weaken it. Why? South African bonds and stocks will be sold and the rand proceeds of these sales will be used to purchase another foreign currency. We’ve seen hints of this already when Bernanke came out to say that tapering would begin in September. He has since retracted this to some extent. Simply speaking, Platinum producers have rand costs and they sell in dollars. In a weaker rand scenario they win. 2) Signs point to platinum demand beginning to increase. The US is beginning to recover, it isn’t a linear recovery, but the overall trajectory of the economy appears to be positive. Look at the improving house sales, look at the improving employment numbers. Supported by easy money policies this should continue. A stronger US economy will also strengthen the dollar. The EU is slowly starting to show tiny signs of improvement, supported by accommodative monetary policies. It is still a long way off, but the signs are encouraging. The effect of all this is that car sales should begin to improve. Why does this matter though? Platinum is used as autocatalytic converters in cars. This has something to do with cleaner emissions. Keeping it simple more cars equate to more demand for platinum (ignoring secondary markets). When global economies collapsed in the first place consumers stopped spending money on non-essential items, such as cars. As unemployment begins to decrease and individuals start to have more disposable income it should translate into greater demand for cars. A greater demand for automobile translates to a greater demand for platinum, which consequently should mean a greater platinum price. What I like about platinum is that it is not heavily reliant on China. For coal and iron exporters China is such an important market. Iron is used to make steel, and coal for energy. Think about how much growth has been occurring in China, and thus the demand for coal and iron has been a no-brainer. However, if you were to believe that Chinese growth is slowing, logically you would expect demand and prices of coal and iron to drop. This is not good for companies who export these goods. Fortunately platinum is not as reliant on Chinese demand, the biggest source of demand being for jewellery. The major problem with platinum however is the labour issues – the strikes and the wage negotiations. At current platinum prices many mines aren’t profitable, this is exacerbated by rising electricity costs as Eskom continues to work on (and make a meal of) the Medupi Power Station. Platinum producers want to close down unprofitable mines, which would cause jobs to be lost. Government cannot have this with unemployment levels already so high. So you have mine companies operating mines at a loss. It is an unsustainable situation. Who knows how this will play out. To make matters worse, miners via their unions are demanding huge wage hikes. I think eventually an improved platinum price will save the day somewhat, but still, let’s hope it is properly resolved. If you were looking to invest in platinum shares, given the labour concerns, it is important to look at companies with strong balance sheets. So lots of cash in the bank, little debt and strong borrowing facilities. The nature of the industry is that it is highly capital intensive. Vast amounts of capital are required just to maintain mines – so it is crucial to look at companies who have large amounts of cash, and can survive operating mines at a loss whilst we wait for the labour situation to play out and for the Platinum price to rise. Think Amplats, rather than Aquarius. Platinum stocks have been completely battered and are cheaper than they have ever been. This doesn’t automatically mean that you buy them, but it certainly presents a great opportunity IF you think things will turnaround. A cheap share relative to history and the market isn’t automatically a good buy. It is always darkest before the dawn… is that some light I see on the horizon? *David Pike is a qualified Chartered Accountant and an aspiring writer*
Posted on: Thu, 08 Aug 2013 05:42:05 +0000
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