BUSINESS DAY TV: ‘Precious metals are set for a year of anomalies’
Peter Major is from Cadiz Corporate Solutions.
BUSINESS DAY TV: Commodities have been sold off over the past couple of sessions with investors banking on a steadier political and economic climate in Europe and a rate rise in the USA in June, and that seeing the dollar getting momentum. Looking at the precious metals price performances in particular, gold steadying near seven-week lows today while platinum has also taken a hit, having fallen by the close. Peter Major of Cadiz joins me in the studio now to take a closer look.
Peter ... interestingly enough we have Thompson Reuters releasing its GFMS Platinum Group Metals Survey for 2017 and being highlighted, is having averaged just over $1,000/oz between 2007 and 2012, the price gap between platinum and palladium has continued its drop to now $100. And that illustrates the support a deficit in the palladium market is providing right now, so is palladium heading to a premium over platinum in your books?
PETER MAJOR: I wouldn’t have believed it but it’s getting so close now, it’s looking like a possibility. But platinum can do most of the things that palladium can’t do so if palladium gets any ... closer to platinum, people are just going to say, "Gee, platinum is more tradable, it’s got other uses as well. I’d just as soon pay a $50 premium or maybe a $20 premium and have platinum as opposed to palladium." So I can’t really see them getting parity and staying there but I never could see platinum being at this kind of discount to gold. It’s at a 1,000-year low relative to gold, it came close here once in 1982 and lasted for a couple of months and went up. So this is going to be the year of anomalies that just continue to be bigger anomalies.
BDTV: What is highlighted is, there’s been a broad balance at a physical level in terms of supply and demand within the platinum market where you would have expected the drop in mine output to offer some support. It’s been counter-balanced by an increase in scrap supply, so talk us through that and given the trend we’ve seen over the past two years, whether you anticipate any shift in trend?
PM: I believe what the problem with platinum was, people started looking at it as an investment metal, especially when it was really running in 2006-2007 then it had another revitalisation in 2010, 2011, and 2012. So they started buying platinum bullion, we’ve heard that some central banks are trying to get authorisation that they can include platinum instead of gold. Now we find out that’s not really the case. There is no substitute for gold and on the industrial side we’ve just produced too much platinum. I don’t think the world realised, SA definitely didn’t realise, that the uses of platinum aren’t enough to justify the kind of supply we were churning out. And as long as people were buying medallions, bars, and ETFs (exchange-traded funds) it was kind of absorbing that. But investment demand is fickle. Once the price turns down, investment demand is just dumped on the market.
So palladium was more in balance because it’s just an industrial metal but platinum was trying to make this transition to gold and with the investment people dumping it, we’ve just got to cut back production. It’s just a very small market.
BDTV: So the 2% drop that we saw last year not nearly enough. We have seen though more stringent capital allocation in light of the lack of recovery in prices, so moving forward what are you seeing down that road?
PM: You’re probably going to see our platinum mines do what our gold mines have been doing for a few years now. They’re going to be ruthless about cutting out marginal and loss-making production. And it doesn’t matter who they are, if it’s Lonmin, Amplats, Northam, and they’re going to be much more stringent about spending capex on additional production. And we’ve seen that in Harmony and the gold mines, they’re just spending what it takes to keep profitable production.
BDTV: Let’s take a look at Harmony because out with a nine-month operational update today, third-quarter performance update too and looking better than AngloGold’s numbers, which were presented yesterday?
PM: They are. Peter Steenkamp has brought another view to Harmony. He says, "Guys, we’re in survival mode, we’re not in expansion mode." The environment out there, Neal Froneman is better at saying what the environment is like but I think Peter Steenkamp, he’s just walking the talk instead of talking the talk. And you saw he’s cutting back capex on a lot of mines that theoretically could have a 20-30 year life. But he says, "It’s too risky, I’m just going to produce at a profit and I’m going to keep my capex low and it’s going to be just capex to keep going rather than capex to extend my life by 10-15 years." Which is kind of sad for the long-term industry but this is about survival. Harmony’s share price is trading at what it was when I was in high school, most people weren’t born then, and that’s 1973. That’s not an investment and so investors want to know that the share price is going to go up not stay flat for 45 years.