Platinum Standard

RAPAPORT… Many people who predicted soaring gold prices during the summer left platinum out of their predictions. But as of press time, the price of the latter metal is $1,435 per ounce — a record high. While both metals have seen their prices rise steadily in recent years, with only occasional dips from one month to the next, only platinum is seeing both an upsurge in demand — for both luxury and technical uses — and an increasing supply pinch. And some platinum experts predict that dramatic changes in the status of this commodity are just around the corner.

DEMAND FROM INVESTORS

“Geopolitical tensions tend to boost both gold and platinum prices,” says David Jollie, publisher of the Platinum Metals Report, and many investors are responding to acute inflation running through 2007 by taking advantage of the hedging quality of platinum against the declining dollar. Tensions over Iraq, not to mention nervous whispers of a possible strike on Iran, have led more and more investors to seek the security of a timelessly valuable metal.

At the same time, analysts point to soaring demand for platinum from the makers of jewelry. One notable example is China, where the city of Shenzhen has undergone a full-scale transition to a processing center for platinum for China’s growing, technocratic, status-conscious middle class. An article in the official newspaper People’s Daily puts the number of platinum-producing firms in the city at 700, employing more than 100,000 people. Soon after its passage through Shenzhen, the platinum hits the market in the form of hotly desired bangles, bracelets, rings, chains, brooches and pendants. Platinum is heavier and denser than gold, and its relative rarity also helps give it a cachet that makes it a desirable metal choice for luxury jewelry.

Platinum is also increasingly in demand in Japan, where an estimated 30 percent of it eventually gets recycled and is returned to the market.

THE SCIENCE OF PLATINUM

Platinum is in demand for many industrial applications. Along with the widespread use of platinum as a conduit in electronic equipment, the metal is playing a role in fighting pollution. In China, where Jollie places the annual growth in car production in the double digits, the metal is increasingly in demand as a catalyst for the process called oxidation. When an exhaust stream passes through a catalytic converter, the platinum coating on the ceramic surface seizes the nitrogen atom and prevents its passage. As a result, it is primarily oxygen, or O2, that leaves the vehicle.

Demographic factors may come into play here as well. Jack Caldwell, a civil engineer at InfoMine, a Vancouver-based corporation that analyzes and assesses mining commodities and stocks, says, “Gold and diamonds have surged ahead because of [demand from] baby boomers like myself.” He says that for his three children, environmental concerns outweigh the appeal of such commodities and that they belong to a generation that may divert its income to environmentally conscious investing.

A historic announcement by the Boston Scientific Corporation underscores the critical need for platinum. In July, the company unveiled a new stent — a tool inserted into an organ such as an artery in order to keep passages open — that would be utilized for the first time in an operation on a living human. Conventional stents were not effective when inserted at a bifurcation point, where an artery branches into smaller ones. The new version, however, made from a proprietary platinum chromium alloy, has thinner struts and greater flexibility, according to company spokespersons.

TIGHTENED SUPPLY

Supply is stretched thin in South Africa, which recently weathered a strike by 5,500 employees of the Northam Platinum Mine, near the town of Thabazimbi, in Limpopo Province. The strike, which began April 29, 2007, and lasted about nine days, cost the company $1,763,409 (R12 million) per day. The miners had familiar concerns over hours, wages and their channels of communication with the corporation’s management. The heart of such issues, however, may involve broader social upheavals, says InfoMine’s Caldwell, since the people running the mining industry still belong to the old structure prevailing before black majority rule came to South Africa. In Caldwell’s view, it is necessary to look at the relationships of the tribal leaders in places like Limpopo Province with the central government in Cape Town to grasp the nature of the unrest.

While a strike at one mine, lasting just over a week, may not sound so dramatic, it can be disastrous in an industry with only ten platinum producing companies, whose combined annual output is only 130 tons. According to precious metals information service gold-eagle.com, that amount is only 6 percent of total yearly gold production in all Western countries combined. South Africa accounts for about 80 percent of annual platinum production; the remainder coming from Russia, Zimbabwe, Canada and the Western United States.

In October, the same Northam Platinum Mine had to shut down once again after a worker fell to his death — right after a number of other mine disasters, including the trapping of 3,000 workers underground in a gold mine when the cables of their lift broke. The resulting headlines focused the world’s attention on the perils of South Africa’s mining industry.

“Very little platinum is held above ground,” says Philip Newman, research director for GFMS, a precious metals consultancy based in London. “There is a lack of above-ground stocks compared to palladium,” and the discrepancy is all the more glaring when you compare platinum reserves sitting above ground to supplies of gold. “All the platinum ever mined throughout history would fill a basement of less than 25 cubic feet,” state spokespersons for gold-eagle.com.

POSSIBLE PEAK

The rising price of platinum may peak in the foreseeable future, according to some analysts. In a conversation with RDR, Huw Daniel, president of Platinum Guild International (PGI) USA, noted a number of countervailing factors that could relieve current shortages.

All the major platinum producers in South Africa, Daniel notes, have developed plans to increase their output of platinum by 5 percent in the years to come, both by expanding existing mines and by opening new ones. The high percentage of recycled platinum in the Japanese market also points to a potential future in which the quantities of marketed platinum transcend the annual output from the mines.