Platinum on its nose

On Monday, amid an ongoing rout in most anything to do with commodities, dollar platinum metal prices smashed down around USD 100 to well below USD 1,600 an ounce, triggering further profit taking in listed platinum producers. The world's three Tier I platinum miners - Anglo Platinum, Impala Platinum, and Lonmin - have now each declined by 40% and more in just a few months.

During these months, it has been widely said that the fundamentals for platinum were probably the least controversial of all commodities. However, given the extent of the dollar metal price decline, some 32% from the historic record USD 2,301 an ounce seen in March, the platinum flurry now appears to have been a mania, similar to that seen in recent years in the likes of nickel, lead, zinc and uranium.

Earlier this year, the three conditions required for a mania may have converged in platinum, sending the prices for the metal and its two key sister metals, palladium and rhodium, into orbit. There had been displacements on the supply side, mainly a series of running negative factors in South Africa, not least power disruption problems. These crystallised during January, when Eskom, the state power monopoly, virtually shut down the country's mining sector for a week.

South Africa produces some 80% of global platinum group metal (PGM) supply, and beyond the power crisis, remains restrained by ongoing government interventions, skills shortages, and safety and maintenance issues. The displacement on the demand side was seen as ever-expanding demand for PGMs, especially from one of its key customers, vehicle exhaust catalyst manufacturers. That displacement has been amplified by ever more stringent environmental standards around the world, and the increasing use of diesel engines in passenger cars.

Further on the requirements of a mania, there was plentiful liquidity available from investors, generally, and especially from hedge funds. The third mania factor was present to the extent that the valuation of platinum assets and companies is difficult, at the best of times. In a rising market however, investors were prepared to venture well into optimistic territory.

While dollar platinum metal is now nearly a third off its highs, in just a few months, palladium has fallen 41% from its recent highs; rhodium has fallen around 20% in just the past few weeks. Nickel, an important byproduct for the South African platinum miners, has also fallen on its nose; in the past six months alone, it has nearly halved from around USD 15/lb.

While the Tier I platinum miners have lost 42% to 45% of their value in the past while, most of the Tier II names have lost between 50% and 60%. A good number of the developers in the broader platinum sector are literally on the fringes of extinction, given the continued general freeze in credit markets, and the more recent pulverization of resources stock valuations in equity markets. Fresh equity issues for mining developers and explorers are going to be nightmarish.

The mania - if that's what it was - in dollar platinum metal prices has seen more than USD 700 an ounce taken off the price in less than four months. The price would have to fall a long way further from current levels of around USD 1,560 an ounce to half the March peak, which would be to around USD 1,150 an ounce.

Contractions of 50% in metal prices are not rare. Uranium recently started recovering from multi-year lows of USD 58/lb, a level well less than half the peak USD 138/lb reported in June 2007. In the past few years, zinc has fallen from USD 2/lb to well below USD 1/lb. At current levels around USD 8/lb, nickel is some two thirds off its record highs of nearly USD 25/lb.