South Africa-Russia bloc could hike platinum prices

During the Brazil-Russia-India-China-South Africa (BRICS) summit in Durban, South Africa, the world's biggest producers of platinum group metals (PGM) announced they planned to set up a consortium to control the flow of precious metals exports.

The consortium would be modelled on the Organisation of the Petroleum Exporting Countries (OPEC), a cartel formed by 12 nations collectively supplying about 41% of the world's oil output.

"We are now forming working groups to work out joint actions on this market," Sergey Donskoy, Russia's natural resources minister, said.

Susan Shabangu, South Africa's mines minister, who signed the agreement with Donskoy, indicated that measures to manage platinum supplies might include taxes and incentives.

Significant rise in prices

"Roughly 70% of the world's annual platinum production comes from South Africa," explains Paul Renken, mining analyst at VSA Capital.

He adds BRICS are intricately linked through commodities, with South Africa and Russia together controlling 80% of the PGM reserves.

In 2012, South Africa produced 34% of the world's palladium mine supply, and Russia produced another 43%, while the countries produced 86 tonnes of palladium and 25 tonnes of platinum respectively.

Because of this oligopoly - a market dominated by a small number of suppliers - Renken says the consortium and the countries involved "would have significant influence for the monthly, quarterly and annual outputs of these individual countries, but specifically there is going to be co-operation between these countries as to exporting their materials.

"That will eventually create a higher level of stability in an otherwise more volatile pricing market," he adds. "They would become 'price setters' of these metals."

Renken does not expect a "big change" in markets initially, but forecasts a "general trend of increased prices, as there would be a higher level of discipline in order to support particular profit margins of the exported metals from these countries".

Prices would not go down in such a scenario.

When confirming the deal, Donskoy said: "The price depends on the structure of the market and we will form the structure of the market."

Anne-Laure Tremblay, precious metals analyst at BNP Paribas, agrees. "Theoretically, if Russia and South Africa join forces and decide on a monthly basis or a quarterly basis how much stock or how much of the metals they are going to release over a certain period of time they would effectively manipulate prices, which OPEC does for oil prices."

However, she says: "In practice, to do this would actually be a bit tricky as some [of the] countries [involved] need money more than others."

Large cash flows

Under the bloc agreement, governments would pay the producing companies first, and then release the stocks to the market on a certain date, which means they would potentially only be paid after the sale of PGM.

The world's largest nickel and palladium producer, Norilsk Nickel, produced close to a 96% share of Russia's PGMs in 2012. But it only represented 1.9% of Russia's gross domestic product (GDP) over the same period, considerably less than in South Africa, where all PGMs made up 8.8% of GDP in 2011.

Yet with uncertainties still remaining over what the agreement between South Africa and Russia involves, Renken expects "it could be weeks, or months," before companies and investors are in the know.

Tremblay warns: "It's early days, and we should be careful whether the announcement is just made to get the platinum prices to go up on the week, or whether they actually have a real motivation to do this.

"The deal is a long shot, especially considering those issues."

Bloc expansion forecast

While details are unknown, Donskoy has confirmed the bloc would invite other countries to join.

Renken and Tremblay agree a plausible candidate would be Zimbabwe, which produces 2% of the world's platinum. Renken adds: "Any country with a sensible quantity of palladium or platinum production could also be invited, but countries such as the US or Canada would be prevented from entering the bloc by their own government or because of trading or monopoly rules."

Could this consortium evolve to include other commodities? "It is something which would be possible but not likely, at least not likely for most metals and materials because they are much more widely produced around the world and a country or countries would need a significant share of restricted supply for this kind of market mechanism to work," explains Renken.

Long-term winners and losers

Winners

International PGM companies' exports would not necessarily be controlled by the states, because the countries could end up buying their production, then block it off, explains Tremblay. "In all, production companies will be getting more money for their production in that scheme, which would be bullish."

Neutral

For small producers such as Sylvania Platinum, Jubilee Platinum or Aquarius Platinum, there wouldn't be a particular issue, says Renken.

Losers

Renken says for major players such as Impala Platinum, or Moscow-based Norilsk Nickel, "it means a great deal: they represent both significant shares of overall respective countries' production as well as employment in those countries".

For immediate refiners and suppliers such as Johnson Matthey, the deal also has particular importance, adds Renken.

Producers based in the US and Canada, who compete against companies based in Russia or South Africa, might have to find a balance and carefully monitor changes in the sector, which will become "pretty tight" says Tremblay.

As platinum and palladium are the primary elements used for motor vehicles' catalytic converters for air-quality purposes, major motor companies based in Europe and Japan would suffer higher production prices.

European and Japanese consumers will be most particularly hit.

"Overall, any oligopoly is bad for any markets," summarises Tremblay. "It will be bad for the biggest consumers of PGM which are the auto companies, followed by European countries and Japan because those countries do not produce meaningful quantities of PGM."