RBC Capital Markets predicts further escalation of platinum price due to South Africa production pressures

RBC Capital Markets has released a research report that concludes that 2008 will see the price of platinum continue to soar as a result of a production bottleneck in South Africa. Platinum prices have surged over $2,000, up 135% since the beginning of 2005, recently reaching a seven-week high amid concerns over power supply difficulties in South Africa which have caused widespread disruption to production.  Eskom, South Africa’s power utility, has inadequately invested in generation capacity, the impact of which could be felt for the next four to five years, or longer.“Given the clear risk that power supply may be constrained, will junior producers, who don’t have the capital to set up smelting operations, be able to sell their concentrate?” asks Leon Esterhuizen, Analyst, Global Mining Research at RBC Capital Markets. “The juniors may well be able to mine, but the majors would have to get increased power allocation in order to smelt and treat more third party material. This then becomes the ultimate bottleneck that threatens to create an environment where metal prices could increase significantly.

“The massive shortage of skills in South Africa is also a problem for producers.  Competition to attract and retain good people has already caused labour costs to escalate by at least 15% per annum and the problem gets worse as new entrants come on stream and start looking for labour and skilled managers.

“Compounding the problem of reduced output is the increasing demand for platinum by the jewellery sector and the automobile industry, which uses the metal in catalytic converters for cleaning tailpipe emissions.

“Further price pressures come from investors who are buying platinum metal-backed exchange-traded funds (ETFs). Platinum ETFs pose a real threat as they may put the market in an ever growing deficit.

“To ensure longer term sustainability of the industry and the market as a whole, there has to be faster expansion of production,” says Esterhuizen. “The junior companies best positioned to take part in this are the ones that are already in production, or will be so shortly, and those that will be expanding output and have, in the case of the juniors, a valid offtake agreement in place” says Esterhuizen.

RBC Capital Markets hosted its inaugural Platinum Group Metals Conference on May 16 in London. The conference brought together the senior management of the world’s largest platinum producers to speak about the opportunities and challenges they face. Speakers included: Eastern Platinum, Mvelaphanda Resources, African Rainbow Minerals, Braemore Resources, Platmin, Platinum Australia, Platinum Group Metals, Ridge Mining and Wesizwe Platinum.

The conference contents are available via audio-only webcast at http://www.rbccm.com/