A long-term cost perspective on PGM prices

Current PGM demand has made many projects unfeasible. But the fall in demand could also obliterate the deficit which has plagued the market over the past few years as well as push the market into a surplus until at least 2014. We expect demand to fall by almost 8% y/y, to 7,22m oz in 2009. Thereafter, we expect a y/y increases for platinum demand. The fall in demand is driven by car sales which could decline by 7m units from levels reached in 2008 as consumers in the US and Eurozone struggle to cope with economic conditions. We expect little support from jewellery demand which we expect to remain largely unchanged. Other industrial uses are also set to decline. In 2010, we expect a recovery in demand. While y/y growth rates could rise, the amount of platinum oz actually consumed would only reach the levels seen last year in 2011. By 2014, we estimate that total demand for platinum could reach 9.125m oz.

Platinum mine supply in 2008 is estimated at 6.7m oz. While we have already seen production cuts at platinum mines in South Africa, we doubt production cuts could completely offset the fall in demand in 2009. At current price levels, we expect production cuts of between 400K and 500K oz. Working with the low end of the range and adding 190K oz of new platinum supply coming to market, total supply should be 7.51m oz in 2009.

Furthermore, in H2:10, as demand starts to pick up, operations which were shut down this year could restart (we estimate 400K), allowing for supplyto come to the market faster than any new developments. We have assumed that the cutbacks are brought to market in equal proportions in 2010 and 2011. Another source of supply is scrap. While this is not set for a massive rise until 2011, scrap and recycled platinum could reach 1.8m oz by 2014. This, we believe, could see the platinum market in a constant surplus until 2014. Should recycled metal increase as mentioned, and demand is close to our assumed numbers, the surplus would rise rapidly as we approach 2014. Above-ground stock would rise as a result. Should this happen, it should restrain prices.

We use our PGM cost model to estimate a price for platinum, palladium and rhodium that is consistent with our estimate of a surplus of 300K oz of platinum in 2009, and the surpluses in following years. In our cost model, we assume mining inflation at 10% y/y until 2014 and ZAR/ USD at $10 in real terms. While cost inflation is low compared to mining inflation in the recent past, current deflationary forces should push some mining costs lower. We further assume that new projects would, in 2008 prices, not be more expensive than current operations. This assumption is justified on the premise that any mine more expensive than current mines would not be a viable operation, given the expected surplus in the market.

There is a caveat to our approach. Above-ground stock ofplatinum could rise by another 3.2m oz by 2014, from the current estimate of about 1m oz. As a result, the market could see this as excessive, and prices might fall. Above-ground stock of 4.2m oz would translate into a 160 days of consumption (at our 2014 demand levels) and this is much higher than the current estimate of 40 days. Arguably, some of the projects listed would not come to market, or at a much smaller scale.

Bullion prices likely to trade sideways today: Karvy Commodities

Gold prices traded in the range of $821-$883.6 a troy ounce with prices rallying strongly in the initial three sessions, as the depreciating dollar enhanced the appeal of metal as an alternate asset class.

The dollar fell significantly against the euro and fell to $1.4719 levels as US Federal Reserve Bank slashed the target lending rate by 75 basis points to 0.25%, the lowest ever. The consensus was of a 50 basis points cut. With policy makers emphasizing that Fed will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability;the metal gold was seen to be strongly buoyant.

Nevertheless, gold prices pared gains as oil fell below $33 a barrel and dollar recovered on speculation that decline in dollar was too steep. Reports showing lesser than expected decline in initial jobless claims and Philadelphia Fed Index, followed by European Commission comments that the euro region may suffer a “substantial” effect from the financial crisis next year supportedthe gains in dollar.

Today on the electronic session, gold prices are currently trading higher by around six dollars,backed by weak dollar and firmer opening in crude oil prices. Silver also gained. On the economic front, we have euro-zone industrial new orders to watch for. The data is expected to side down further in the month of November by further 4%.

On the whole, we expect a higher opening ondomestic MCX market and prices are expected to be trading sideways for the day.