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As wage talks between South African mines and labour have become deadlocked, the mood among mine workers and labour in general is for strikes and I doubt it will be averted. Last year’s settlements were generally below 10% but expectations are much higher this time around. I think we are probably in for a minimum of two to three weeks – similar to what happened in 2009. The major two-week strike in 2009 from 24 August to 8 September saw Implats lose 50 000 oz of production and Aquarius about 17 000 oz. With South Africa’s production approximately 88 000 oz per week, it means best 88 000 oz may be lost if all the mines close for one week. If the strike lasts three weeks, a total of 264 000 oz or the equivalent of 40% of last year’s total investment demand will be lost. There was very little industrial action in 2010 – in the spirit of the FIFA World Cup. But let us have a look at what happened to the platinum price and the prices of other precious metals in 2009 from the time the strike started at Impala Platinum to when it ended.
Source: Plexus Asset Management (based on data from I-Net Bridge). The platinum price did not react initially as it was felt the company had sufficient inventory to fulfil its obligations to its customers. The price surged after it became clear that the strike would last longer and intensified. On the day the strike started the platinum price closed at $1 239 per ounce. On the day the strike ended the price closed at $1 347 – a surge of $108 per ounce or 8.7%! The positive momentum also benefitted gold, which rose by $75 from $943 to $1 018 per ounce or 8% over the same period. Palladium, the other major platinum group metal, lagged, though, as the price rose by $16 from $282 to $298 per ounce or 5.7%. I am of the opinion that this time around the impact of a strike could be much greater than in 2009. Platinum demand was then still subdued in the aftermath of the 2008/2009 global liquidity crisis and producers such as Anglo American Platinum were still slashing production to adjust to lower demand. Although global economic growth has slowed down mainly as a result of supply-line shortages due to Japan’s terrible twin disasters, supply and demand are relatively evenly matched. With the wheels of industry turning again and consumer confidence improving, Japan’s economy is heading for better times and that should rub-off on the rest of the globe. A three-week strike resulting in a loss of 264 000 ounces of platinum is certainly going to lead to a blow-off in the platinum price. Yes, you can bet your bottom dollar the producers have probably used the recent weakness in the price to buy in the expected production shortfalls resulting from the strikes by purchasing futures and call options. My message to the platinum bears: let the seller beware!
I was interviewed in Cape Town a few days ago by Chris Mayer, author (or should I say wordsmith) of the Capital & Crisis newsletter. The newsletter only cares about one thing – value. Investment strategies come and go, but history shows that buying value is the only reliable way to build your wealth year after year with the least risk. Read more about Capital & Crisis here. The interview was broad-based, but emphasized my views on platinum and the South African stock market. (Also see my blogs “Be ready for rebound in platinum – BUY!” and “South African stocks – resources offering value again”.) The paragraphs below come courtesy of Chris Mayer and Capital & Crisis. While in Cape Town, we had a meeting with Dr. Prieur du Plessis, president of Plexus Asset Management. Du Plessis was a perfect gentleman in all respects, and I enjoyed our meeting with him, in which we ranged over many topics. Below, we’ll take a look at a few of du Plessis’ observations, in particular his argument why platinum is cheap. Du Plessis, you may have guessed, is a French name. French Huguenots faced persecution in the 17th century and some of them wound up here in South Africa. Of these Huguenots, author H.V. Morton notes in his book In Search of South Africa (1948), “their true memorial is… the great wine industry of the Cape. With the Huguenots came men who knew all the secrets of the French vineyards.” So it was appropriate that we met du Plessis at one of these celebrated vineyards in the Durbanville Wine Valley, only about 20 minutes from Cape Town. The valley is picturesque, as you can see from this shot of the Nitida Farm, one of the 12 wineries here:
We met at Cassia Restaurant, which I highly recommend should you ever get to this part of the world. Over fresh line fish and excellent wines, we talked about investing in South Africa. From a big-picture point of view, du Plessis believes the market is fairly valued. He favors looking at the long-term price to earnings ratio of the market as a whole. Specifically, he looks at Robert Shiller’s cyclically adjusted price to earnings ratio, or CAPE. It sounds complex, but very simply, it is a 10-year look at earnings in an attempt to smooth out the fluctuations from year to year. The theory is that if a market gets too far above (or below) its CAPE, you can expect it to revert to the mean over time. On this measure, South Africa’s market is only slightly above its long-term average of 17, as this next chart shows:
This is a helpful backdrop, but the problem with CAPE, as du Plessis well knows, is that markets can stay over- or undervalued for long stretches of time. As du Plessis points out, using CAPE, you may be out of the market for a long time and miss significant upside. Nonetheless, du Plessis has his favorites. Resource stocks, for example, have trailed the broader market. So if you compare the price to earnings ratio of only resource stocks against the broader index, you’ll find that resource stocks drift near multiyear lows:
Source: I-Net Bridge; Plexus Asset Management. “Some stocks, such as Anglo American, are currently trading at earnings multiples last seen during the 2008/2009 liquidity crisis,” du Plessis says. Another resource idea du Plessis liked is platinum. Platinum sold off heavily after the Tohoku earthquake that struck Japan in March and wrought so much destruction there. Why did platinum sell off? Du Plessis filled us in.  By Prieur du Plessis, on May 17th, 2011 posted in: Investment, Platinum  10 people had their say - chime in!
The platinum price took a heavy beating when the Great Tohoku Earthquake struck Japan on March 11 and seemed to recover afterwards before retreating recently.
Sources: I-Net Bridge; Plexus Asset Management. The recovery and subsequent recent decline was more a reflection of cross-rate movements of the US dollar than anything else as the platinum price in terms of euro has remained in a very narrow range since the end of March.
Sources: I-Net Bridge; Plexus Asset Management. The weakness of the platinum price is more apparent if it is compared to gold. Since Japan’s twin disasters, platinum’s premium to gold has been in a downtrend, falling from $366 to $270 or by 26.2% at Friday’s close.
Sources: I-Net Bridge; Plexus Asset Management. In terms of euro the premium fell to 191 from 234 or 18.4%.
Sources: I-Net Bridge; Plexus Asset Management. But why the massive hit on platinum? The Japanese auto industry was hit particularly hard by the earthquake and tsunami that followed. Japan’s production of cars and trucks fell by 535,000 units or 57.3% in March compared to March last year. Toyota was scheduled to resume production in the second half of April, but only to 50% of normal production. If I assume that only 50% of cars and trucks were produced in April compared to last year, this will mean a loss of another 313,000 vehicles. If production in May returns to 75% of the same month last year, another 180,000 vehicles would have been lost compared to last year’s total production of 9.5 million cars and trucks. Those production losses add up to a staggering 1,028 million vehicles or nearly 11% of 2010 production! The impact of the Kobe disaster in January 1995 was miniscule compared to that of the twin disaster in March. I estimate that the production of only approximately 40,000 units were lost in January that year while production returned to normal in February. Japan consumed a gross 535,000 ounces of platinum for auto-catalysts in 2010. It therefore means that Japan’s auto industry uses on average 0.054 ounces of platinum per vehicle. It therefore transpires that since March platinum demand from the Japanese auto industry alone has dropped by approximately 58,000 ounces. That excludes the ripple effect of supply disruptions in other countries such as Malaysia that saw auto production in that country slipping by 24.7% in April. I will not be surprised if the loss of the total demand for platinum in the global auto industry this year could add up to in excess of 100,000 ounces or 1.7% of last year’s total supply. While it seems small, the 100,000 ounces should be compared to the average investment demand of approximately 55,000 ounces (2008–2010). That is huge! The big question is when the platinum price will start to recover. I think it is generally accepted that this time the damage to Japan’s economy and infrastructure is significantly worse than after the Kobe disaster. The main difference between now and then is that the yen has not been allowed to weaken against the US dollar to the same extent as in 1995 when Japan’s exports to the US were seriously hampered.
Sources: I-Net Bridge; Plexus Asset Management. |
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