AMCU agrees to take an offer to workers, possibly ending the 21-week strike

The strike premium on the platinum price appears to have been removed following news of a possible agreement between the three biggest producers and the AMCU. Platinum is now trading below the levels seen before the strikes began in January, indicating markets have overreacted to the news. We remain bullish both platinum and palladium and believe that prices will recover in the coming months.

• Platinum and palladium prices dropped sharply as Amplats, Implats and Lonmin announced an “in principle” agreement has been reached with the Association of Mineworkers and Construction Union (AMCU).
• This could bring to an end the 21-week long strike that has seen the loss of over 1moz of platinum and over 500koz of palladium, according to our calculations. Representatives of the three biggest producers and of the AMCU will meet today to seal the deal.
• We believe platinum will be the most hit by the news of a resolutions as over 70% of production of the metal is concentrated in South Africa. However, given the minimal strike premium priced into platinum prices now and a pick-up in global demand, we believe the correction will be short-lived.
• While a strike resolution will reduce immediate uncertainty and put downward pressure on prices, it will be some time before most mines are brought back to working condition, with some mines at risk of permanent closure or permanent reduction of production capacity.
• In addition, after a sharp run-down in PGM inventories by both producers and consumers, inventories will have to be re-built.
• With the US economy picking up, China reflating and Europe and Japan demand stabilising, platinum and palladium demand is expected to quite substantially outstrip supply in 2014 and into 2015.
• Johnson Matthey forecasts platinum and palladium to see deficits equivalent to 14% and 15% of global demand in 2014.
• On our estimates, the metals are trading below their cash operating costs. As we write, platinum is currently trading around 20% below the estimated cash operating costs per platinum equivalent ounce. Therefore, in our view, the current price drop may represent an opportunity for medium to long-term investors to accumulate the metals at attractive prices.
• We continue to target platinum and palladium prices to rise to US$ 858/oz and US$1,550 respectively in the next six months.