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WSJ article regarding Platinum
ShinyThingsInPM
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Weaker Rand Puts a Crimp Into Platinum
The sharp weakening of the South African rand spells more bad news for precious-metal investors, who already are reeling from the fall in gold prices.
Platinum, which is a key component of car-exhaust systems and is also used in jewelry, has declined 14% in dollar terms this year to $1,329.10 a troy ounce on Monday, the lowest level since October 2009. Three-quarters of the world's platinum comes from South Africa. There, prices are up about 3% this year when converted into rand, the country's currency.
That has implications for investors in the $4 billion market for platinum futures. A weaker rand cushions the impact of lower platinum prices on South Africa's miners, giving them more flexibility to keep up output at a time when many traders assumed they would be forced to cut production.
Most of mining company revenue is denominated in dollars. When the rand is falling against the dollar, the repatriated revenue translates into more rand brought into company coffers, which boosts profitability and encourages miners to maintain production.
The rand's influence on platinum prices is unusual in commodities markets, in which one country rarely dominates production. Typically, investors are more concerned about the value of the dollar, which is used to set commodities prices internationally.
Like gold, platinum has been buffeted by investor worries about the Federal Reserve dialing back its stimulus measures, which has caused Treasury yields to climb. Rising bond yields make zero-yielding precious metals unattractive to investors.
Weakness in the rand, also partly a result of the jitters about the Fed, lowers the likelihood of production cutbacks, removing another potential support for global platinum prices.
"The biggest factor driving [supply] is the price of platinum in rand," said Nicholas Johnson, a portfolio manager at Pacific Investment Management Co.'s $30 billion Commodity Real Return Strategy Fund. "The producers don't care about anything else."
His fund closed out bullish bets on platinum prices as the rand weakened in May and early June. On Monday, $1 bought 10.0713 rand, compared with nine rand at the start of May. The dollar has climbed 19% versus the rand this year.
South African producers receive dollars for platinum they export but must exchange the currency for rand in order to pay costs like wages, electricity and fuel. Less than 15% of the platinum producers' costs are denominated in dollars, according to Macquarie Group MQG.AU -2.85%.
"A fall in the value of the rand in the short term is almost as beneficial for their revenue as an increase in the dollar price of platinum," it said.
Macquarie estimates that the rand's drop has allowed miners to earn profits they would normally see when platinum trades at $1,700 an ounce, a 27% premium to today's prices.
To be sure, South Africa's miners are struggling to stay profitable even with the rand's decline, which could mean cutbacks are still on the way. About 80% of South Africa's platinum mines are operating at a loss or just breaking even, according to the Chamber of Mines in South Africa. Platinum supply is likely to total 5.6 million ounces in 2013, lagging behind demand of 6.5 million ounces, a record shortfall, according to analysts at HSBC HSBA.LN +2.03%.
Miners' woes may even be driving the rand lower, said Jean-Marc Bonnefous, managing partner at Tellurian Capital Management, LLP, a commodities hedge fund based in London that is betting platinum prices will rise.
"One of the reasons the rand is falling is the terrible state of the metals mining industry in South Africa and the fact that companies are bleeding cash," Mr. Bonnefous said. The weak rand is "just a symptom of a broader problem, which itself is bullish for prices."
Platinum bulls have already faced a setback in 2013. Anglo American Platinum Ltd., AMS.JO +0.92%the world's largest platinum producer, said it would reduce its platinum output by 400,000 ounces, or about 7% of global supply. But in May, the company said it would cut only 250,000 ounces following protests by unions and the South African government. The company had threatened to close down parts of two mines and lay off workers in order to reduce production. Other mining firms have scaled back output and reduced staff amid labor unrest.
Jeremy Baker, portfolio manager at the $623 million Vontobel Belvista Commodity Fund based in Zurich, said his fund closed bullish bets on platinum prices earlier this year as the rand weakened and it looked increasingly likely that Anglo Platinum would cut output less than expected.
"I think the weaker rand is definitely helping [South African miners] a lot at the moment," he said.
The sharp weakening of the South African rand spells more bad news for precious-metal investors, who already are reeling from the fall in gold prices.
Platinum, which is a key component of car-exhaust systems and is also used in jewelry, has declined 14% in dollar terms this year to $1,329.10 a troy ounce on Monday, the lowest level since October 2009. Three-quarters of the world's platinum comes from South Africa. There, prices are up about 3% this year when converted into rand, the country's currency.
That has implications for investors in the $4 billion market for platinum futures. A weaker rand cushions the impact of lower platinum prices on South Africa's miners, giving them more flexibility to keep up output at a time when many traders assumed they would be forced to cut production.
Most of mining company revenue is denominated in dollars. When the rand is falling against the dollar, the repatriated revenue translates into more rand brought into company coffers, which boosts profitability and encourages miners to maintain production.
The rand's influence on platinum prices is unusual in commodities markets, in which one country rarely dominates production. Typically, investors are more concerned about the value of the dollar, which is used to set commodities prices internationally.
Like gold, platinum has been buffeted by investor worries about the Federal Reserve dialing back its stimulus measures, which has caused Treasury yields to climb. Rising bond yields make zero-yielding precious metals unattractive to investors.
Weakness in the rand, also partly a result of the jitters about the Fed, lowers the likelihood of production cutbacks, removing another potential support for global platinum prices.
"The biggest factor driving [supply] is the price of platinum in rand," said Nicholas Johnson, a portfolio manager at Pacific Investment Management Co.'s $30 billion Commodity Real Return Strategy Fund. "The producers don't care about anything else."
His fund closed out bullish bets on platinum prices as the rand weakened in May and early June. On Monday, $1 bought 10.0713 rand, compared with nine rand at the start of May. The dollar has climbed 19% versus the rand this year.
South African producers receive dollars for platinum they export but must exchange the currency for rand in order to pay costs like wages, electricity and fuel. Less than 15% of the platinum producers' costs are denominated in dollars, according to Macquarie Group MQG.AU -2.85%.
"A fall in the value of the rand in the short term is almost as beneficial for their revenue as an increase in the dollar price of platinum," it said.
Macquarie estimates that the rand's drop has allowed miners to earn profits they would normally see when platinum trades at $1,700 an ounce, a 27% premium to today's prices.
To be sure, South Africa's miners are struggling to stay profitable even with the rand's decline, which could mean cutbacks are still on the way. About 80% of South Africa's platinum mines are operating at a loss or just breaking even, according to the Chamber of Mines in South Africa. Platinum supply is likely to total 5.6 million ounces in 2013, lagging behind demand of 6.5 million ounces, a record shortfall, according to analysts at HSBC HSBA.LN +2.03%.
Miners' woes may even be driving the rand lower, said Jean-Marc Bonnefous, managing partner at Tellurian Capital Management, LLP, a commodities hedge fund based in London that is betting platinum prices will rise.
"One of the reasons the rand is falling is the terrible state of the metals mining industry in South Africa and the fact that companies are bleeding cash," Mr. Bonnefous said. The weak rand is "just a symptom of a broader problem, which itself is bullish for prices."
Platinum bulls have already faced a setback in 2013. Anglo American Platinum Ltd., AMS.JO +0.92%the world's largest platinum producer, said it would reduce its platinum output by 400,000 ounces, or about 7% of global supply. But in May, the company said it would cut only 250,000 ounces following protests by unions and the South African government. The company had threatened to close down parts of two mines and lay off workers in order to reduce production. Other mining firms have scaled back output and reduced staff amid labor unrest.
Jeremy Baker, portfolio manager at the $623 million Vontobel Belvista Commodity Fund based in Zurich, said his fund closed bullish bets on platinum prices earlier this year as the rand weakened and it looked increasingly likely that Anglo Platinum would cut output less than expected.
"I think the weaker rand is definitely helping [South African miners] a lot at the moment," he said.
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