In our view, most of the bearishness in the short-term price performance is driven by sentiment rather than fundamentals.
There is currently no verifiable data on the quantity of unreported above-ground stocks, who holds them, in what form or how liquid they are. Yet analysts still expect these unquantified stocks to adequately cover any fundamental deficits. Whatever their quantum, they are certainly lower than they were in 2008 when the metal price was twice what it is today.
There is broad consensus amongst analysts regarding the growth in demand for PGMs. When it comes to South African supply, however, the views are rather divergent. Few analysts are taking cognisance of the problems facing South African PGM miners and due to the sector’s good performance over the last few years the market expects South Africa to rebound and produce more than 4.5 million ounces of platinum per annum by 2016 – hence the widely held belief that the market will be in surplus within the next year. We are of the view that South African supply will not reach 4.5 million ounces per annum during the next two years largely due to the difficult operating environment, which has been compounded by significantly reduced capital investment into the sector over the last four years. We expect work stoppages and power and water constraints to continue. These factors, combined with the difficulty of raising capital in a low price environment, underpin our bearish view on South African supply.