Power Shortages In South Africa Lift Platinum

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Includes: PPLT
by: Tony Daltorio

A precious metal which receives much less attention than gold or silver is platinum.

The metal is used in catalytic converters, electrical contacts and electrodes, jewelery and a number of other applications. It can be found in nickel and copper ores, as well as some native deposits, mostly in South Africa which accounts for 80 percent of the world production.

So what happens in South Africa is of the utmost importance to the platinum market.

Several weeks ago, the price of platinum rose above $1,500 a troy ounce for the first time in a month and has since continued on to trade above $1,600 an ounce. Platinum is now up about 20 percent from a low reached in late December.

The reason? Fears of power shortage in South Africa. Several weeks ago Eskom, South Africa's state-owned electricity company, warned consumers to prepare for possible power shortages in the weeks ahead. In the company's own words, "The risk of power outages is high."

The platinum industry is a heavy user of electricity and any outages could have a dramatic effect on prices. Investors need to only look back to 2008 when power-related shutdowns at South African mines caused platinum prices to hit a record high of $2,290 an ounce.

Threats of power outages in South Africa has certainly come at a bad times for platinum bears who have shorted platinum futures. In mid-January, according to UBS, short positions in U.S. platinum futures had risen to record levels, rising by 60 percent from mid-November. These traders were playing the short-term trend since platinum had tumbled since September on fears of slower global growth.

Edel Tully of UBS said that a large proportion of traders who had sold platinum short had done so at prices of $1,500 and above. So in her words, "Platinum is approaching the 'pain zone' for many".

For those individual wishing to partake of the pain inflicted on the shorts, one can purchase the ETFS Physical Platinum Shares exchange traded fund (NYSE: PPLT who owns platinum bullion.

The fall in platinum prices had started to exert pressure on platinum mining companies such as Anglo Platinum ADR (OTC: AGPPY), Impala Platinum ADR (OTC: IMPUY) and Lonmin ADR (OTC: LMNIY) as platinum prices were closing in on levels below the cost of production for some miners. Of course, these companies will suffer if they are not able to produce platinum due to power outages.

Another factor for these companies is that an important byproduct of platinum production - rhodium - had also tumbled by about 20 percent since November.

A broader way to play South African power shortages would be to short the South Africa ETF, the iShares MSCI South Africa Index Fund (NYSE: EZA.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.