Platinum/Palladium long term
Equapolar: Will Pt production keep up with demand?
By: Dorothy Kosich
Posted: '13-OCT-05 05:00' GMT © Mineweb 1997-2004
RENO--(Mineweb.com) A study of platinum group metals by an Ottawa consulting firm specializing in mineral economics predicts that South African mines will achieve an average 7.5% growth in platinum production as world platinum demand grows to nearly 10.5 million ounces by 2014.
In their publication, "Platinum Group Metals: World Resources Economic & the Future," authors Gary H.K. Pearse and Yana Amis predict that platinum prices could average $1,000 an ounce by 2009 while long-range combined PGM prices could rise to an average $400/oz before 2014.
Pearse is a principal for Ottawa-based Equapolar Resources, which recently published its second edition of "Platinum Group Metals: World Resources Economic & the Future." Amis is president of the firm's publications division. Their analysis was based in in-depth research, interviews with industry, government and academic experts, and the expertise and experience of the authors. The first edition of the report was published in 2001.
SUPPLIES
Despite a 7.3% annual growth in South African platinum production, a 1.67-million-ounce drawdown of stocks of dealers, fabricators, banks and depositories (DFBD), and 2.91 million ounces from scrapped autocatalyts between 2000 and 2004, "supplies remain tight," according to Pearse and Amis.
By 2009, the study predicted South African mines will achieve an average 7.5% growth in platinum production to 7,425,000 ounces of annual production. Nevertheless, they added, "The authors judge that easily accessible resources will have been earmarked for development over the next five years and that further development will be underground and at greater depth requiring greater capital (and operating) costs."
"Also, the boom in foreign investment and new companies in South Africa has likely peaked. This yields a production figure for 2014 from Southern Africa of 9,475,000 ounces of platinum," according to the study. The authors admitted to an optimistic scenario based on company plans.
Despite increased exploration of primary PGM properties and new nickel projects, Pearse and Amis assert that no additional PGM output will occur in Canada until at least 2014. "In any case, a realistic time frame for development of a new large, open pit project in Canada or the United States is a minimum of 10 years, only half of which relates to technical factors," they wrote. "This aspect alone puts any potential PGM project outside of the 10-year forecast period of the study."
"In summary, only an additional 136,000 ounces palladium and 42,000 platinum, all from Stillwater Mining projects, can be expected from North America during the forecast period and this projection is not made without recognition that output from primary PGM projects are at some risk going forward in North America," according to the study.
However, Equapolar believes that Stillwater major shareholder Norlisk's Russian complex "is admirably suited to rationalize production to more directly respond to PGM demand (and probably to replenish depleted stocks)."
The study suggested that "the sector that gave rise to the platinum group's soaring demand is destined to become a formidable competitor as a supply element and dampener of prices of the future." Equapolar forecasts recycling recovery of 1.16 million ounces of platinum, 1.03 million ounces of palladium and 280,000 ounces of rhodium by 2009. By 2019, the study projects 2.375 million ounces of recycled platinum recovery, 4.5 million ounces of palladium, and 680,000 of rhodium.
DEMAND
The Equapolar study forecasts baseline world platinum demand to be 7,622,000 ounces this year, nearly 8 million ounces in 2006, and almost 10.5 million by 2014. The authors predicted a firm floor price near $900 an ounce by 2014, which is based on the demand for jewelry platinum.
Equapolar asserted that new markets for platinum demand in jewelry are far from mature. "Moreover, platinum fever has yet to infect Asian markets outside of Japan and China. Middle East markets, along with long, rich jewelry traditions, are likely to come into play in the future," the study said. Pearse and Amis predict total platinum in jewelry demand of 2,352,000 ounces this year, 2,462,000 ounces in 2006 and 3.3 million ounces of demand by 2014. They added that they believe the Japanese platinum-in-jewelry markets has bottomed "and will recover at 6% per annum to 2009, thereafter averaging 2% per annum to 2014." The authors also suggest that North American markets will recover to 380,000 ounces annually by 2009 and, subsequently, achieve an average 2% growth rate through 2014.
The study forecasts a 10% growth rate in platinum use for oil refining and chemical processing catalysts, and glassmaking. For this year, they predict 840,000 ounces of demand, 880,000 ounces in 2006, and 1.1 million ounces by 2014.
PALLADIUM & RHODIUM DEMAND
"With prices of the last few years, palladium demand fundamentals are on firmer ground," according Pearse and Amis. The study predicts an overall annual demand growth of 6% until 2009, which will decline to 4.5% annually between 2009 and 2014.
Equapolar predicted that baseline overall world palladium demand will total 8,085,000 ounces this year, increase to 8.6 million ounces in 2006, and rise to 13,080,000 ounces by 2014. They set a palladium forecast floor price of $375 an ounce by 2014.
The study noted that almost 90% of rhodium demand is for auto catalysts. "Our forecast for auto catalyst use is for 3.5% annually to 2009 and then 3% to 2014," they wrote. "For other industry uses, we forecast 8% a year to 2009 and then 5% to 2014." Pearse and Amis also predicted a 7% average annual growth rate for ruthenium to 2014 and an aggregate annual demand for iridium at 8% to 2009, then dropping to 5% until 2014.
PRICE FORECASTS
Equapolar offered both low-range and high-range forecasts in its study. Their low-range assumes a conservative scenario for moderate accumulation of DFBD stocks to replenish greater reduced inventories, but not so great as to trigger mining production cutbacks. This scenario would keep prices in the $825 to $900 range until 2014. For their high-range forecast, they factored in new Asian development, and assumed increased usage of diesel technology. "Accordingly our bullish expectation is for platinum to rise through the $900 level reaching $950-$1000 an ounce average in 2009 and to continue to the $1100 level by the end of the forecast period."
For palladium, the study's low-range price forecast anticipated prices to remain near the $200 an ounce level until 2007, eventually climbing to $350 by 2014. "For our more bullish forecast, continued strong Asian development could create some indifference to the price of palladium while it is below $300. Also, considerable research is ongoing, stimulated by the comparatively low price," the study said. Substitution for platinum and new uses could nudge palladium to $350 per ounce by 2009 and to the $500 level by 2014, Pease and Amis suggested.
"In summation, considering an oligopolistic PGM industry structure for the future (as in the present), production cost levels, and above-ground accumulation, the very long run prices for combined PGM are projected by Equapolar in the $350 to $400 an ounce range in 2005 $US."
INVESTMENT STRATEGIES
In the study, Pearse outlined strategies for investment in PGM securities, futures and bullion. He noted that palladium suffers from vulnerabilities that don't plague platinum including recycling, the availability of palladium from large nickel projects, a preponderance of palladium portfolios outside of southern Africa, and a risk of low-grade deposits becoming marginal producers.
Pearse suggested that investment priorities should include large tonnage and amenability to low-cost mining and processing, the presence of significant other values including nickel, copper, other PGM, gold and cobalt, and the possibility that a junior company project will prove attractive to a major company.
For platinum, Pearse wrote, "an obvious conclusion of this study is that platinum rich deposits should be given higher priority than others [PGM metal deposits] of similar grade, minability and accessory values." He also explored the geography of investments. "A project delayed loses value at the discount rate for present value plus interest on sunken costs, plus interest on forgone earnings, a substantial financial penalty, and drastic reduction in profitability," according to Pearse.
His geographical priority list for PGM investment is lead by South Africa, which offers a favorable project development time frame of three years. Although Finland averages a 5-year development period, "resources so far examined are of the palladium rich variety." The Finnish Government participates in development, undertakes technical surveys, drilling projects, and other work on behalf of mining companies, according to Pearse.
Equapolar Resource Consultants produces in-depth mineral economic reports. Pearse is a professional engineer, economic geologist, and mineral economist, who has worked as a consultant in industrial minerals and rare minerals. Co-author Amis is an expert in legal, social and economic research, and specializes in project negotiation and facilitation.
For more information concerning the study, go to www.equapolar.ca.
