Investing in Platinum: Profit from South Africa's Energy Squeeze

South Africa's economy is expected to grow by 4% in 2008, doubling the U.S. outlook. Its energy consumption is surging even higher, leading to mine shutdowns and sending platinum prices through the roof.

On Wednesday, February 20, South African finance minister Trevor Manuel announced a five-year, $7.6 billion investment in state energy utility Eskom to beef up supplies ahead of the showcase 2010 World Cup soccer tournament, and to sustain the country's booming economy.

South Africa leads the world's platinum producers, with 80% of all international production and 88% of recoverable reserves (former Soviet states hold most of the rest). But for at least five days in January, the country's gold and platinum processors ground to a halt, as blackouts spread across the country due to thin coal-fed electricity supply.

Platinum supplies are always tight, because it takes approximately ten tons of mined ore to get just one ounce of the precious metal. As we see in the chart below, all the platinum produced in the world in 2006 only added up to a mere 8.7% of the total gold, and 1.2% of silver mined that year.

click to enlarge images

About half of that platinum ends up in catalytic converters which cut down on toxic emissions from internal combustion engines. Another 40% gets used in jewelry and the remaining 10% or so is held in physical form for investment purposes.

Now, with South Africa's energy woes adding to the natural state of scarcity for this metal, investing in platinum has become the investment of the century.

Higher international emissions standards for diesel trucks are pushing platinum demand up, and since supply is always tight, platinum's price per ounce soared by nearly a third in 2007--a staggering one-year jump for a precious metal.

Over the past five years, platinum prices have tripled, going especially hyperbolic lately with this South African power problem.

2008: Another Record Year for Platinum

My colleague Luke Burgess laid it out plainly in a recent issue of Gold World:

Global platinum supplies are expected to fall 135,000 ounces, or 2%, to 6.66 million ounces this year. Meanwhile, demand is expected to increase by 195,000 ounces, or 2.9%, to a record 6.925 million ounces.

This would leave the platinum market with a supply deficit of 265,000 ounces, the seventh year in the past eight that the market has recorded a shortfall.

Sounds grim, right? Wrong.

This is anything but a bleak situation for investors, and there are multiple ways to get in.

Platinum Investments Drive South African ETF

South Africa's economy is leaping into the 21^st century and the commodity-heavy iShares MSCI South Africa Index ETF (NYSE:EZA) shows us what's fueling the country's boom.

From 2004-2007, the South Africa ETF gained an average of 26.67% per year! And, this ETF is heavy on metals, especially gold and platinum.

Among EZA's top holdings are Impala Platinum Holdings (IMPUY.PK), with a 9.37% fund allocation, and Anglo Platinum Limited (AGPPY.PK), which makes up just under 5% of EZA.

In just one month, from January 28 to February 26, Impala gained over 26%, while Anglo Platinum shot up by 17.26%!

Finally, a Platinum ETF!

The iShares South Africa fund isn't the only ETF at play here. In late 2006, talk of a platinum ETF similar to the StreetTracks Gold Trust (NYSE:GLD) sparked a rally in platinum, driving it through the important $1300/ounce barrier for the first time in early '07.

Remember what I said before: only 10% of the world's platinum is kept for investment purposes.

So last April's launch of PHPT, a fund backed by physical platinum on the London Stock Exchange and managed by ETF Securities, was sort of a self-fulfilling prophecy: start buying tons of platinum from a tight market, and the price of your platinum will go up immediately.

Sure enough, the British Platinum ETF [LON:PHPT] is up by over 46% in the past six months!

South Africa is today--and is likely to always be--the center of the world's platinum resource industry, and we are clearly seeing the link between national energy supply squeezes and the prices of precious metals.

Platinum is the perfect play this growing link, and we'll keep you up to date on more ways to profit.

Disclosure: none

Comments

[Dawson Lodge:]

Great info Sam. If you are a platinum fan, check out this mine:

www.platinumgroupmetal...

The link: "Western Bushveld joint venture video" is one of the most fascinating 3D geology presentations I have ever seen:

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2008 Mar 05 02:57 PM

[d_teller:]

Are the securities of PHPT available to U.S. citizens. My understanding from the ETF.com info regarding ETC's is that they weren't for U>S> investors.

2008 Mar 05 09:10 PM

[ecru:]

Informative. I own Eastern Platinum(ELR,T) units and think it is a very interesting story. Any thoughts?

2008 Apr 25 04:09 AM