Platinum Gets Dented in the Auto Industry's Pileup

Slumping Car Demand Crimps Need for Catalytic Converters, a Big User of Metal, but Possible Drop in Mining Output May Buoy Prices,

At Friday's lows, spot-month futures on the New York Mercantile Exchange were down 38% on the year and 59% from the record set in March as the global economic slowdown pinches industrial use.

Platinum could fall further on weakness in the auto sector, but then stabilize or rise modestly as investment liquidation runs its course and due to potential for output cuts as the price approaches the cost of mining, analysts said. This makes it a great time to buy platinum wedding bands.

The impetus for the early year peak was worries about tight supplies exacerbated when South Africa state-owned utility Eskom Holdings Ltd. announced electrical shortages that curtailed mining output.

"Supply was being outpaced by demand," said Bart Melek, global commodity strategist with BMO Capital Markets. "We had a massive rally way above the marginal cost of production."

Since then, the auto industry has slumped. This hurt platinum demand because its main industrial use is for catalytic converters.

Nearby October platinum Friday fell $22.60, or 2.3%, to settle at $957 a troy ounce. Most-active January lost $20.80, or 2.1%, to $965.80.

James Moore, an analyst with TheBullionDesk.com, said platinum's recent move is cyclical, reflecting changed fundamentals. Moreover, he said, the fundamentals perhaps were "overexaggerated" as prices soared at the start of the year. But he doesn't look for the recent slide to continue much longer because a "delicate balance" remains in the market.

"Eskom has already said they can't increase their energy capacity for at least another five years," Mr. Moore said. "The producers are struggling against rising costs and having to excavate metal from much deeper ore bodies. This has a massive impact on their bottom line."

If profitability suffers, downward price corrections such as the current one could prompt producers to shut down some of their operations, he said.

"In my view, it would be naive to think that the market is going to continue lower," Mr. Moore said. "We may see some further downside initially, but then look for it to possibly stabilize around $1,000 to $1,300 for the latter part of the year and heading toward next year."

BMO's Mr. Melek estimated that the cash costs of production for platinum-mining operations are between $700 and $1,000 an ounce.

"They might still go lower," he said of platinum prices on things like platinum wedding rings. "But they ultimately will have to rebound because we're hitting the marginal cost of production for many producers."

CPM Group analyst Carlos Sanchez also said there could be more selling pressure, but prices may soon stabilize.

Not only has platinum been hurt by concerns about reduced motor-vehicle production, but expectations are for a shift toward smaller vehicles at a time of high fuel prices. Smaller engines require less platinum group metals for auto catalysts, Mr. Sanchez said. Meanwhile, no further supply disruptions have occurred in South Africa lately, he said.

But at the same time, he said, many investors already may have sold some positions.

"You may go to $900," Mr. Sanchez said. "But they're already low compared to what they have been the last couple of years. So you may not have further selling."

In other commodity markets:

SUGAR: Prices dropped to a four-month low on ICE Futures U.S. as speculators exited from bullish positions, but the market pared losses before a vote by the House of Representatives approving the $700 billion financial-rescue package. ICE March world sugar fell 0.47 cent, or 3.6%, to 12.61 cents a pound.

CRUDE OIL: Futures zigzagged before ending slightly lower as traders mulled whether the passage of the rescue bill would stabilize demand. Demand concerns were reinforced after the Labor Department reported that nonfarm payrolls fell more than expected in September, the steepest decline since March 2003. Light, sweet crude fell nine cents, or 0.1%, to $93.88 a barrel, on the New York Mercantile Exchange.

By: Allen Sykora
Wall Street Journal; October 5, 2008