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Heraeus Precious Appraisal

  • Edition 11 - 30 March 2020

Market Watch

South Africa’s shutdown threatens PGM supply. South Africa has been placed on a 21-day lockdown to slow the spread of the coronavirus. Underground mining operations will be put on care and maintenance for a minimum of three weeks, and there is a possibility (given today’s low metal price regime) that a few marginal shafts may remain closed for even longer. However, smelters and refineries may remain operational on a lower-scaled basis, meaning the processing of stockpiled surface material will continue. These plants are highly cash generative and are strong contributors to the South African economy. Mining operations at Anglo American Platinum’s Mogalakwena (open pit) and Mototolo (highly mechanised) mines may also continue on a reduced basis. There is a possibility that this shutdown will cause delays to mine expansions and new projects. South Africa accounts for 70% of the world’s supply of platinum, 35% of palladium, 81% of rhodium, 80% of iridium and 90% of ruthenium.

The tight palladium market, with its geographically diverse supply base, is less exposed to South Africa’s temporary shutdown. Nevertheless, the palladium price rallied, gaining $420/oz (+20%) on the news of South Africa’s shutdown. Mines in other key regions such as Russia and North America remain operational, but the situation is constantly changing. Sibanye-Stillwater will be maintaining output from its US operations (Stillwater), but there will be a temporary impact on production growth from the Blitz project. In Russia, Nornickel’s PGM output remains unchanged.

Russian Platinum continues alone with the Arctic Palladium project. Russian Platinum has withdrawn from the joint venture with Nornickel regarding the future Arctic Palladium project, owing to a lack of approval by one of Nornickel’s shareholders. Russian Platinum will proceed with the development of the Chernogorskoye and the southern part of the Norilsk-1 deposit on its own, which means the total size of the project has reduced by around a third. The development of the first deposit is due to start from 2024. Details of the services and resources Nornickel can offer are still in discussion.

The world is shutting down as China starts to revive. Most car plants in China are starting to ramp up production after extended closures for much of the first quarter, providing modest relief for global manufacturers as the COVID-19 outbreak causes factories to shut down across the rest of the world. Annual sales in China are predicted to decline by 10% this year (source: China Passenger Car Association), with demand expected to return to normal in the second half of the year. However, the outlook for the global market is continually changing and remains weak. Most plants across Europe, the US and Latin America are now closed, pushing the palladium and rhodium markets into an inevitable surplus.

All precious metals prices bounced last week. Sentiment became more positive and stock markets rallied while the dollarweakened. Sharp rebounds often occur after rapid price declines, but it could simply be a short covering rally. If so, further downside is possible in the near term. The news of supply disruption from South Africa provided an additional boost on Wednesday, however, and saw the rhodium price rally $3,000/oz (+46%) in a day before closing the week up 92%. The fall in demand for metal following the initial shutdown in China is likely to have been partially offset by stockpiling while prices were low earlier in the month.

Gold rallied last week, driven by strong physical demand, after three major metal refineries in Switzerland suspended operations due to COVID-19 and travel restrictions started to threaten the movement of metal around the world. The price on the COMEX gold futures exchange in New York reached a $70/oz premium over the London spot price on Tuesday due to a shortage of the 100-oz bars required to settle futures contracts in the US. The prices usually trade within a few dollars of each other. CME Group launched a new futures contract on Tuesday evening that could be settled against the delivery of 400-oz or 1-kg gold bars, in addition to the usual 100-oz bar, to relieve liquidity issues. The gold price is now up 6% over the year to date, while silver is down 20% despite reports of strong coin and bar demand. The gold:silver ratio is still high (112.8) and silver continues to underperform.

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The material contained in this document has no regard to the specific investment objectives, fi nancial situation or particular need of any specifi c recipient or organisation. It is not provided as part of a contractual relationship. It is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as advice on the merits of making any investment.

This report has been compiled using information obtained from sources that Heraeus and SFA (Oxford) Ltd (“SFA”) believe to be reliable but which they have not independently verified. Further, the analysis and opinions set out in this document, including any forward-looking statements, constitute a judgment as of the date of the document and are subject to change without notice.

There is no assurance that any forward-looking statements will materialize. Therefore, neither SFA nor Heraeus warrants the accuracy and completeness of the data and analysis contained in this document.

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Unless expressly permitted by law, no part of this document may be reproduced or distributed in any manner without written permission of Heraeus. Heraeus specifi cally prohibits the redistribution of this document, via the internet or otherwise, to non-professional or private investors and neither Heraeus nor SFA accepts any liability whatsoever for the actions of third parties in reliance on this document.

Heraeus Precious Metals - Setting the PGM agenda for the years ahead

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