Platinum losses increase industry deficit

The big news today is that of the National Union of Mineworkers in South Africa.  The union is planning a 1 day strike action on December fourth in protest against safety issues. It should come not come as a great surprise as the union has been flagging the suggestion for some weeks.

If the action goes ahead it will be the first time in many years that the whole industry would be affected.

A permit has yet to be granted, but there will be a meeting on Tuesday next (November 27^th) between the mining companies, the union and an arbitration authority; this may result in such a permit being issued.

Regulations stipulate that such an action cannot be targeted at a specific sector of the industry, but it is well documented that the primary area at issue has been the platinum sector. There have been problems at Anglo Platinum Limited, Impala, Lonmin and Northam with the result that Anglo Platinum has now downgraded its production forecast for the year, taking some 150,000 ounces off the forecast that had been released in July.

Anglo now expects that its refined platinum production this year will be between 2.45 million and 2.5 million ounces, down from 2.6 to 2.65 million ounces. This takes into account the impact of the suspension of production at Turffontein in Rustenburg in order to address safety issues, a stoppage that is expected to last 134 days. This would imply a loss of perhaps 9,000 ounces this year and a further 18,000 next (independent estimate, not a figure from the company), along with the completion of the ramp-up of production following the seven day shut down at Rustenburg Platinum Mines in July 2007, plus the implementation of safety interventions at all remaining Anglo Platinum mines, which will include one-day shut downs.

The company also noted the impact of the continue shortage and turnover of staff, wage-related industry-wide strikes by mining contract employees and the potential impact of the NUM action with respect to worker safety awareness.

Impala's losses at the Clapham shaft at the Marula mine were contained to approximately 450 ounces of platinum following the closure in late October, which effectively amounted to three days' operation. Northam closed its mine for just less than a week in mid-October following an accident, reducing platinum production by roughly 6,500 ounces.

At Lonmin, operations were suspended at two shafts for a four-day period in October following an accident. Although the company does not expect that this will have a material impact on output for the full year, ground problems have affected recoveries as Lonmin has moved across towards the eastern side of its Marikana mine. This has led to a bottlenecks at the refineries, which is expected to mean that between 70,000 and 90,000 ounces of platinum production will be deferred to fiscal 2008 (which ends on next September 30^th).

The company said in October that its platinum sales in fiscal 2007 fell to 793,584 ounces from a restated 939,654 ounces in the previous year due to the recovery reduction and some smelter problems. Sales in fiscal 2008 are expected to reach 900,000 ounces.

The combined impact of these developments--along with losses from the seven day strike and a change in work schedules at Stillwater in Montana (estimated platinum losses 5,000 ounces)--thus takes some 170,000 - 175,000 ounces out of the production line for this year and will further deepen the deficit that the platinum market is expected to sustain this year. Although the deficit itself is expected to be relatively small, this year will be the seventh year in eight that the market has been in deficit. With inventories already relatively low this will continue to keep market conditions tight.

Allied to this and in conjunction with the continued inflow of funds to the commodities sector as a whole, holdings in the platinum Exchange Traded Funds have increased markedly over the past few weeks.

The holdings in ETF Securities' platinum fund stand at 88,669 ounces, having added 62,633 ounces over the past four weeks. On a simple straight-line extrapolation this addition is equivalent to annualised 814,000 ounces, or 11% of world fabrication levels in 2006.

It appears that the holdings in the Zurich Kantonal Bank have remained broadly steady at 60,000 ounces, giving a combined total of just less than 150,000 ounces. To put this further into context, this is equivalent to 2% of annual world fabrication demand.

Spot prices have now reached US$1,470, just shy of the recent intra-day record of $1,490. The market is not as nervous as it was this time last year when rumours of imminent ETFs aw lease rates soar, with metal for one month briefly commanding 100%.

Lease rates are nudging higher, with one-month rates standing at just below 3.3%, and further forward rates all in excess of 5%. The market is not unduly tight, but it is cautious and, subject in part to the outcome of next Tuesday's meeting, further gains look to be in order.