Currency contagion impacts platinum and palladium

South Africa accounts for more than 70% of platinum mine supply and around 40% of palladium mine supply

Carsten Menke, OpinionIndustry Expert
Carsten Menke joined Bank Julius Baer in December 2009. In his current position, he is responsible for the analysis of commodity markets, in particular base metals and precious metals. Before moving to Bank Julius Baer, Carsten Menke worked at Sal. Oppenheim Jr. & Cie. in Cologne, where he set up the Commodity Research unit. In 2002, he started working for Deutsche Bank as a Relationship Manager and became investment advisor in 2003. He received his degree in Business Administration at the University of Cologne in 2007 and became a CFA Charterholder in 2011.

August 14, 2018

Platinum and palladium: Currency contagion

The turmoil in Turkey and the slide in the lira caused contagion in other emerging market currencies, the South African rand for example.

The weakness of the rand, which is down around 8 percent versus the U.S. dollar over the past week, has important implications for the platinum and palladium markets as it lowers the dollar-denominated production costs in South Africa, which accounts for more than 70 percent of platinum mine supply and around 40 percent of palladium mine supply.

While production costs in rand are up around 30 percent over the past five years, they are down more than 10 percent when converted into U.S. dollars. The basket price of the metals produced in South Africa, platinum, palladium and other precious metals, tracks the costs very closely.

Hence, platinum and palladium do not appear cheap despite the recent declines below $800 and $900 per ounce. While bearish sentiment in the futures markets leaves some recovery potential, it should be limited.

The lifeline the weak rand provided to South Africa’s mining industry is the main reason why there have not been more mine closures over the past few years.

The industry still suffers from overcapacity and this is unlikely to change given the fierce opposition the government and unions provide to any restructuring plans.

Another restructuring attempt was launched by Impala earlier this month, and it remains to be seen if and to what extent it will be implemented. We stay on the sidelines of the platinum and palladium markets for now.

Any opinions expressed here are the author’s own.

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