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Could a fall in production propel platinum higher?

by , 22 September 2015

The price of platinum has almost halved over the last five years.

After scaling the dizzy heights of $1,800 following the financial crisis, the price of the precious metal has now settled below $1,000 an ounce.

But production of platinum is set to fall. Investment into the sector is also dwindling.

Could these factors be what platinum needs to send its price higher?

Let's take a closer look…


Platinum production looks set to drop


The low platinum price is thanks largely to weak demand. A lower price has led some of the largest producers in the sector to start cutting production.

Have a look at the chart below of the platinum price over the past five years…


Chart of the platinum price


Last month, the World Platinum Investment Council (WPIC) released a report that gave some insight into what could lie ahead for the sector.

The WPIC said that South Africa, the biggest producer of the metal, will reduce output by 600,000 ounces in 2016. That’s a 16% drop.

As the price of platinum has ebbed lower, capital investment is down 63% since 2008. This will challenge supply in the years ahead, explains Peter Krauth in Money Morning US.

Many producers, including Lonmin and Glencore, are cutting production. And it’s not just SA where cutbacks are happening to platinum production.

In the US, Stillwater Mining Co, a platinum and palladium producer, is laying off 7% of its workforce in a bid to cut costs.


What lies ahead for platinum?


After huge strike action last year, mines in SA face rising wage costs over the next few years. This is likely to lead platinum producers to cut costs through job losses.

This squeeze in the industry is leading to money flowing into platinum exchange traded funds. As David Jollie at Mitsui & Co Precious Metals said, it suggests investors see value at current prices.

Money in these funds is getting near to record levels.

With the challenges facing the platinum sector at the moment, the longer term is looking brighter for platinum.

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Could a fall in production propel platinum higher?
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