Opportunity seen in platinum group sell-off

The sell-off in platinum group metals continues due to uncertainty surrounding the damage done by Japan’s massive earthquake.

Large automotive and electronic industries in Japan means the country has significant exposure to these metals. In 2010, Japan accounted for 15% of global platinum demand (1.2 million ounces) and 16% of the world’s palladium demand (1.5 million ounces)

Platinum and palladium prices have declined 10% to 15% in the past month, while the South African PGM Equity Index has fallen even harder and faster, according to RBC Capital Markets analyst Leon Esterhuizen.

“The sell-off as a result of the Japanese earthquake has been exacerbated by ongoing issues in the Middle East which comes as governments across the world also look to start fiscal-tightening cycles – all of which could have a negative impact on future economic growth,” he told clients in a note.

Although this will likely slow the pace of expected demand, the analyst believes there are really no fundamental changes to the PGM market outlook.

Assuming a complete two-month loss of auto and electronic output from Japan, Mr. Esterhuizen said that would equate to a 1.1% reduction in global platinum demand and 2.1% for palladium in 2011. That amounts to approximately 4 and 7.5 days of supply, respectively.

“Any such reductions would therefore see some short-term delay to our forecast market tightening thesis, but will also serve to push the market tightness further towards the heart of the looming South African electricity supply shortage,” the analyst wrote.

He said it is important to note that neither palladium nor platinum ETFs have seen significant liquidation in recent days.

Mr. Esterhuizen considers this a buying opportunity in the sector as the fundamental story has not changed – the market will be short PGM for most of the next three years.

He also noted that the cost base in South Africa’s PGM industry is still on the rise, which will require higher metal prices even if demand is flat.

“PGM stocks show very low valuation multiples – even at current low metal prices flat forward,” the said. “The downturn in PGM equities has outpaced metal prices; we could thus see a strong rebound in share prices if the metal prices recover even just a little.”