High Mining Costs, Supply Concerns to Boost Platinum Prices in 2012

February 22, 2012

Despite the sharp rise in gold prices in recent years, platinum continues to slump. Consecutive years of global supply surpluses knocked down platinum prices from an all-time high of $2,276 to irrationally low levels.

For roughly five months now, platinum has been cheaper than gold. While this is by no means unprecedented, it is certainly far from normal. Gold hasn't been worth more than platinum since December 2008 (prior to that, not since December 1996)--and for good reason. 80% of all the world's platinum comes from just one country-- South Africa--and it's more costly and difficult to mine there than perhaps anywhere else.

South Africa's 6% inflation and rising wages increased platinum miners' average cash costs to over $900/oz. last year, compared to $700/oz. on average for global gold producers. That means gold presently sells for almost 2.5 times its average cash costs, while platinum is worth just 1.85 times its mining cost, suggesting platinum is undervalued relative to gold.

To make matters worse, labor disputes continue to plague South Africa's platinum miners. Anglo American Platinum, which contributes 40% of the world's annual production, said on Jan. 19 that 2011 output would be lower due to a series of safety stoppages. The following week, the world's fourth largest producer, Aquarius Platinum, announced a 17% yr/yr decrease in quarterly output at its Kroondal mine due to a series of regulatory interruptions (i.e., inspections).

Just three weeks ago, the world's second largest platinum producer, Impala Platinum laid off 17,000 workers after an illegal strike at its Rustenburg mine, which normally mines nearly 12% of all the world's platinum at a rate of 20,000 oz. per week. Although 7,800 workers have been rehired, it's not enough to recommence operations.

In light of this series of disruptions so early in the year, it is highly likely that we could see considerably less output than last year. Since the 2011 supply surplus was less than 200,000 oz., according to Johnson Matthey, the ongoing stoppages at the world's largest platinum mines could easily cause the first supply deficit in seven years--regardless of any increase in output from the world's third largest producer, Lonmin. A potential deficit coupled with increasing cash costs for platinum miners supports much higher platinum prices in the months ahead.

This article was originally published by Investinations on www.argmaur.com.