South Africa – the post-apartheid version – is a young country as far as Nation States go. Yet today, there are doubts about whether South Africa can survive.
That’s the sentiment I get, anyway, from watching CNN or reading wire service reports. It’s hard NOT to be pessimistic when you read about the 34 people killed at Lonmin’s Marikana platinum mine in mid-August.
The deaths at Marikana were followed by widespread strikes across the platinum and gold industries.
Thousands have been fired. Production in both industries has been seriously interrupted. There are international doubts about the future of South African mining. Those doubts have weighed on share prices for gold and PGM miners.
And given these question marks about the mining industry, nationalisation, and political stability, you wouldn’t want to invest in South African precious metals stocks in this atmosphere? Or would you?
Platinum and Palladium – The Other Precious Metals
The sheer terror and fear mainstream investors might have in South Africa right now is obviously a perfect contrarian scenario.
This is one of the few chances in the last five years that you can find real quality assets mispriced because of investor perception. There is certainly a heap of political risk.
But there is also a massive opportunity. I think most people will realise that by 2013, which is why I suggest you take advantage of it now, while the opportunity remains.
What’s more, one metal I’m talking about has recently gone into a supply deficit for 2012. That deficit should grow in 2013. The stage is set for higher prices.
But what metals am I talking about in general?
The platinum group metals.
Did you know Ironman’s heart is made of palladium, not gold? Billionaire industrialist and tycoon Tony Stark may not be a real person, but he knows how to pick a valuable precious metal for its autocatalytic properties!
Industrial demand for the PGMs is a key driver of higher prices. So is their actual scarcity. And because of both factors, investment demand (via Exchange Traded Funds) could emerge in 2013 as another big catalyst for higher metals prices.
There are six different metals included in the PGM complex: platinum, palladium, rhodium, ruthenium, iridium, and osmium. The name platinum comes from the Spanish ‘platina,’ or little silver. When the Spaniards found silver in Colombia, platinum was considered an impurity and a by-product. That’s definitely not the case today.
The PGMs all have particular qualities that have made indispensable to the modern world. Platinum and palladium are especially resistant to corrosion and oxidisation.
This became important in the mid-1970s, when clean air legislation began to affect car makers in the US and Japan. The PGMs became the metal of choice for reducing pollution from motor vehicles.
Platinum and palladium are key ingredients in the construction of catalytic converters. An autocatalyst is a cylinder of honeycombed metals set inside a stainless steel canister. The entire contraption is known as a catalytic converter. But it’s the autocatalyst that we’re most interested in.
Platinum is a lot more useful for diesel engines. But for gasoline or petrol engines, platinum and palladium are interchangeable. The main determinant of which metal gets used is price.
There are other industrial uses for PGMs. But the car market is the most important. About 4.4 million ounces of 2011′s total palladium production went to the automotive market. This little fact surprised me.
Bullish Trends for the Auto Industry
That is, I wasn’t surprised that palladium is used in the automotive market. I was surprised that once you get out of the North American/European/Japanese/ Australian news bubble, the forecast for global auto sales is surprisingly robust.
The more cars that get built and shipped in the developing world, the better it is for PGM demand and prices.
Production of ‘light duty’ cars should reach 81 million units this year, according to US-based palladium producer Stillwater Mining. China is obviously leading the charge here. In 2009, China over-took the US as the world’s largest automaker.
It should produce around 20 million cars this year.
When I spoke with a full time PGM analyst in South Africa, I was struck by how sanguine he was regarding the car market. It’s growing in places like Russia, China, Brazil, and India.
It’s a pure BRICs story. He assured me that once you get outside the bubble of the industrialised world, the car market is looking bullish.
I remain sceptical (by nature). But the drive to toward tighter emission regulations (for cleaner air) in all the world’s economies supports platinum and palladium demand regardless of the number of cars produced.
Precious Metals to Watch in 2013
Other factors lead me to believe 2013 will be a good year for PGMs, and palladium in particular. Supply is already in deficit. Above ground stockpiles are being run down.
Investment demand from ETFs was around 400,000 ounces in 2012, and will increase to half a million ounces in 2013. And jewellery demand has emerged as a new factor as well.
Keep in mind that platinum and palladium production occur at the same time from the same ore bodies in almost all cases. Palladium is relatively abundant. In fact it’s two times more abundant than gold in the earth’s crust.
But the trouble is finding it in large enough concentrations to mine it economically. I can’t emphasize enough this enough. This is the single biggest reason I expect palladium prices to head higher next year
South Africa will remain a critical supplier of them no matter what. If South African production is interrupted, it will almost surely lead to higher prices.
So how to profit?
Bullion is worth a look. So are ETF’s. Then there’s the much riskier mining stocks.
You have an industry under siege, a metal in supply deficit, and more geopolitical risk than you can shake a stick at. If you like buying when others are fearful, it doesn’t get any better than this.
Editor, The Denning Report
From the Archives…
Why You Should Always Be Looking to Buy Small Cap Stocks
23-11-2012 – Kris Sayce
China is Now the World’s Biggest Gold Producer – and Consumer
22-11-2012 – Dominic Frisby
The Stock Market Gets Squeezed
21-11-2012 – Murray Dawes
Buy Quality Gold Stocks That Have the ‘Right Stuff’
20-11-2012 – Dr. Alex Cowie
Picking the Hot Commodity Stocks of 2013
19-11-2012 – Dr. Alex Cowie
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