Platinum prices have risen sharply in trading today after the world's largest platinum producer, Anglo American Platinum Ltd. (AAUKY.PK), announced that it will suspend production at several of its mines in South Africa. The rally has helped platinum prices move above gold for the first time since March 2012.
Rising Costs and Expectations of Slower Growth in Demand
Anglo American Platinum, which produces around 40% of the world's mined platinum, announced that it will suspend production at several mines in South Africa. The planned move will lead to 14,000 job losses and a decline in annual production of 400,000 ounces.
The company made the decision to suspend production after conducting a review of its business. The review, which was announced in February last year, was done in response to revised expectations for platinum demand growth and several structural changes that have eroded profitability in recent years. Platinum producers have been under pressure in the last year due to rising operating costs and depressed prices. Also, strikes at several South African mines last year hurt output.
Anglo American Platinum plans to reconfigure its Rustenburg operations into a sustainable 320,000-350,000 ounces platinum producer across three operating mines. The company said that four unsustainable, high-cost shafts will be put on long-term care and maintenance. The company also said that it will divest its Union Mines at the right time. The restructuring will result in R3.8 billion of annual benefits by 2015.
Speaking to Reuters, John Meyer, analyst at S.P. Angel, said that Anglo Platinum will not be the last company to cut output. Meyer expects platinum miners to pull back by 25% to 30%, which is going to have a severe impact on prices.
Platinum Prices Surge
Following Anglo American Platinum's announcement to slash production, platinum prices surged in trading today, extending gains from Monday. At last check, spot platinum was trading around 2% higher at $1,685.50 an ounce. Prices hit an intraday high of $1,699.50 an ounce earlier today. Platinum has been best performing precious metal in the first two weeks of 2013, gaining around 10%.
The ETFS Physical Platinum Shares (PPLT), which provides investors with a return equivalent to movements in the platinum spot price less fees, was up more than 2% to $167 in pre-market trading today. The ETF had finished 1.75% higher at $162.99 on Monday.
Platinum Moves Over Gold for the First Time in 10 Months
Historically, platinum traded at a premium over gold; however, the relationship was broken for much of last year as gold benefited from an environment of ultra-loose monetary policy, while platinum prices remained under pressure due to concerns over demand. Platinum briefly overtook gold in March last year before once again trading at a discount to gold.
Platinum prices, following today's rally, have once again overtaken gold prices. At last check, spot gold was trading 0.6% higher at $1,677.14 an ounce. In pre-market trading, the SPDR Gold Trust ETF (GLD) was up 0.80% to $162.84, after finishing 0.30% higher at $161.54 on Monday.
Can Platinum Sustain Premium Over Gold?
With platinum moving above gold, the question is: Cthe white metal sustain its premium? While supply concerns pushed platinum prices sharply higher in September last year, the rally didn't last long. However, analysts at UBS say that this time around the threat to supply side could result in a more exaggerated rally in platinum prices. UBS precious metal analyst Joni Teves said, "The difference in 2013 is that we are starting off with a chunky deficit and mine closures would easily aggravate that shortfall. We therefore expect platinum prices to be relatively more reactive to supply side risks this year."
However, many analysts say that platinum's premium over gold is not sustainable. According to some analysts, platinum market remains oversupplied. David Govett, head of precious metals at Marex Spectron, noted that there is no doubt that platinum fundamentals lend themselves to higher prices, but not sky-high ones.
On the other hand, concerns over the debt ceiling issue have once again boosted gold's safe-haven appeal. Saxo Bank's vice president told Reuters that the debt ceiling debate should also offer some support as it once again raises the risk that U.S. growth could be hurt.
Gold is also likely to benefit after Federal Reserve Chairman Ben Bernanke played down concerns of some Fed officials that the central bank's bond-buying program will lead to higher inflation. Gold had fallen sharply earlier this month after minutes of Fed's December FOMC showed that some officials wanted the central bank to end its bond-buying program this year itself.
However, Bernanke's comments on Monday eased concerns of an early end to the Fed's bond buying program. Speaking at the University of Michigan, the Fed chairman said that he doesn't believe significant inflation is going to be the result of the bond buying program.
Gold should also benefit from strong physical demand from China, as well as monetary easing from the Bank of Japan.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.