How to Pick the Winning Mining Stocks to Profit From the Platinum Deficit
By Sasha Cekerevac for Investment Contrarians |
While many people have been looking to gold over the last few years, another precious metal that may also benefit is platinum. As many people know, supply and demand are key when it comes to the pricing of any precious metals, including platinum. Mining stocks that are producing platinum in excess of demand will put downward pressure on prices. Conversely, if demand was stable for platinum and mining stocks were unable to fulfill demand, the deficit would be good news for prices.
An interesting report by Johnson Matthey stated that it’s highly likely that the platinum market will be in a deficit. Such a scenario would certainly be bullish for platinum mining stocks, which aren’t affected by any operational issues. Jonathan Butler, the author of the report, states that a significant reduction in the supply of platinum and the recycling of catalytic converters is going to move the platinum market into a deficit. (Source: “Platinum Market Forecast to be in Deficit in 2012,” Platinum Today, November 13, 2012, Johnson Matthey, last accessed November16, 2012.)
The report cites severe disruptions in South African mining as one cause, among others, of the shortfall in platinum; these disruptions will result in a 10% decline in worldwide platinum supplies while demand remains firm.
South Africa, specifically, will have a 12% decrease in platinum extracted, the lowest 11 years, according to the report.
This is one major issue that people must be aware of when investing in mining stocks. Regional disruptions due to strikes, political instability, and other operational problems are inherent in all mining stocks, not just those involved in the platinum industry.
When we talk about portfolio diversification, not only are we referring to a portfolio’s variety of industries and assets, such as mining stocks, but we are also referring to diversification in the geography of its stocks, which is extremely important. The worst-case scenario would be to have a high percentage of assets invested in one sector, such as platinum mining stocks, located in one country that is undergoing radical political reforms, as can be seen in the recent labor strikes and turmoil in South Africa; these events are not only affecting platinum mining in the region, but they are also causing massive platinum supply disruptions worldwide, meaning the entire sector is affected.
Chinese demand is expected to increase, as the Johnson Matthey platinum report indicates that it believes jewelry demand will reach a three-year high. This is met with a decrease in platinum recycling from catalytic converters, for which the report cites an 11% decrease.
Chart courtesy of http://www.StockCharts.com
What does this mean for platinum? On the surface, it does appear that favorable fundamentals, in addition to higher levels of money printing, should be bullish for platinum. Of course, there are no certainties in life. With the price of platinum holding above its 200-day moving average (MA), it’s certainly above the lows of the year, which should be bullish for platinum mining stocks.
While mining stocks cannot predict the price of platinum any more than you or I can, what they can do is control their own operational costs. Supply disruptions in the platinum market will be a benefit to those firms that are not directly involved in the disputed areas, such as South Africa. I would look for platinum mining stocks that have a strong management team who can prevent operational disruptions. This is what a well-seasoned senior management team is paid for—their knowledge and experience in running a tight ship. I would also keep an eye on car sales, as they’ve been very strong so far this year. If that continues, we should see further demand in 2013 for platinum.