More pain for platinum stocks

Lonmin had been trading recently at around £34.50 but it pulled back today to R471 on the JSE which is equivalent to £33 while it traded in London at £33.26.

Other shares which have come in for punishment include Aquarius Platinum (Aquarius) and Impala Platinum (Implats).

Aquarius had kicked up from a 12-month low of R54.40 to trade around R70 within days of Xstrata launching its bid for Lonmin because of investor speculation over other possible merger and acquisition activity in the sector.

It has since pulled back to around R58 losing 4% in today's trading alone.

Implats has been badly hit dropping to levels around R196 which is more than 10% down since it published excellent results last week for the year to end-June.

The underlying reason for this is weakening fundamental demand for platinum group metals (pgms) but JP Morgan analysts Steve Shepherd, Allan Cooke and Michael Jansen point out investor activity in the metals markets has also played a major role.

In particular, they pointed to the activity by exchange traded funds (ETFs) in small commodity markets which has dramatically increased price volatility.

"This conclusion helps to explain why, in our view, the producers of the metals were so vehemently opposed to the development of an ETF market for pgms," they commented.

In a recently published report the analysts said, weaker demand fundamentals for pgms have "crept up" on the market and surprised investors in the metals.

"This has led them to 'dump' platinum in particular which has accelerated a decline in prices which, if left only to fundamentals, would have declined more gradually.

"We doubt fundamentals alone could have been enough to move prices in the way we've seen."

The analysts commented the platinum price has now returned to the level it was at before the market was "shocked" by the power and safety disruptions which started to surface late last year on the South African mines.

"These issues are probably what caused investors to 'pile into' platinum - and perhaps these are now under better control than they were," they said.

Move into surplus

But the JP Morgan analysts do not believe the improvement in market fundamentals so far is sufficient to justify a recovery in pgm prices in the short term.

They commented, "Fundamentally we anticipate that the platinum, palladium and rhodium markets will move into surplus - if they have not already done so.

"Global consumer confidence is low. To us, this means that demand for vehicles, consumer electronic products and jewellery should be weak relative to a year or so ago prior to the financial crisis.

"This weaker appetite that we see co-incides with a recovery in SA pgm production from (the base of) a weak first half of 2008 and the ramping of a number of expansion projects."

Looking longer-term the analysts pointed out JP Morgan expected a global economic recovery to start in 2009.

"On this basis, we expect the demand for pgms to start to recover in the second half of that year and this should lead to some metal price recovery.

Such a recovery could be significantly influenced by the behaviour of investors in the pgms. If investors decide that, once again, pgms are a "must have" exposure and they start buying ETFs a recovery in prices could be accelerated, they said.

The analysts stated the risk to this expectation of a recovery in metal prices was that the global economic recovery predicted by JP Morgan did not materialise and consumers withdrew further into their shells.

- MiningMX.com

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