Because the mining companies pay costs in a strong currency but take payments in a weak currency, the rand's strength against the dollar erodes earnings.
The rapid increase in costs means prices are unlikely to fall far from current levels, most analysts believe.
And let's imagine the scenario where platinum prices stay steady or even fall. It won't be a pretty picture. Leon Esterhuizen, mining analyst at RBC Capital Markets, puts it this way: “If we get sideways prices for even a year you will see [mine] shutdowns.” He added that the big platinum producers are “running out of [profit] margin.”
Johnson Matthey, in its annual report, also stated that platinum prices would not fall far from current levels of $1,765 per ounce.
Its annual report estimates a net surplus of just 20,000 ounces of platinum at the end of 2010. This is down from a surplus of 635,000 ounces the prior year. The drawdown was due to last year's recovery in car manufacturing.
But even if the price of the metal does rise, do not expect the normal supply side response.
Due to the geological freak of nature, most platinum production will continue to come from South Africa and Zimbabwe, although production is increasing in both Russia and North America.
With the notorious power shortages in South Africa, the mining companies simply do not have enough reliable electricity to expand production at their mines. This in itself will support platinum prices.
For investors looking to profit from rising platinum prices, perhaps the best way is through the use of exchange traded funds. One such ETF is backed by actual physical platinum. It is the
ETFS Physical Platinum Shares (NYSEARCA:PPLT
If one does purchase PPLT, an investor should keep in mind the well-known volatility of precious metals day-to-day prices. Make sure to properly manage your risk via position sizing.