The sudden rise in platinum prices since the start of October has been nothing short of phenomenal. From plunging to seven-year troughs of $908 per ounce late last month, the white metal has gained 10% in just over a fortnight and was recently sitting back above the $1,000 marker.
Investor sentiment for platinum has returned as further delays in Federal Reserve rate hikes have dented the value of the US dollar. Indeed, the Dollar Index — a measure of the greenback versus a basket of currencies — struck seven-week lows just this week. In addition, platinum has been caught in the gold price updraft, the yellow metal having advanced 7% during the past couple of weeks, too.
Prices primed to pump higher?
Well, Bank of America-Merrill Lynch certainly feels that platinum could be in for strong price gains in the months and years ahead. The broker expects an average price of $1,065 per ounce for 2015 to advance to $1,100 next year, before marching to $1,250 in 2017 and $1,425 in 2018.
Bank of America believes that Chinese platinum demand has now stabilised, and fully expects physical off-take from the jewellery and autocatalyst segments to rebound strongly next year, pushing the market into deficit.
However, the broker acknowledges a range of factors that could keep platinum prices under the cosh. Adding to the risk of rising prices on jewellery demand, and lower sales to European buyers, Bank of America notes that “producers in South Africa need to show more production discipline,” adding that “putting more ounces into the market at lower cost is not a recipe for success.”
Lonmin responded to such calls in July by announcing it was reducing production by some 100,000 ounces each year by 2017, achieved through the closure of its Hossy and Newman shafts in South Africa. And Glencore announced just this month it was closing its Eland mine in the country.
Auto demand set to dive?
Although a welcome step in the right direction, I believe the platinum market remains a risky bet at the current time.
As Bank of America notes, demand from Europe remains a critical factor for metal prices looking ahead. And with the fallout of the Volkswagen emissions-rigging scandal threatening the future of the diesel engine — 48% of platinum demand comes from autocatalyst builders — sales to this key European-centric market could nose-dive in the years ahead.
On top of this, the likes of Lonmin also face the ongoing problem of breakneck cost inflation. Lonmin itself has taken the decision to concentrate on immediately available ore reserves for mining activities, but the issue of rising wages, power tariffs and general operational costs remain a millstone around the industry’s neck. When you throw in the potential for fresh strike action — a common problem in South Africa’s mining sector — costs are in danger of spiralling still higher.
Platinum prices have risen as quickly in recent weeks as they had previously fallen, reflecting the volatile nature of market sentiment at the current time. Should further disappointing data emerge from China in the near-term, I believe the metal — and consequently shares in Lonmin and Jubilee Platinum — could be sent hurtling lower once again.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.