CIBC slashes platinum forecast

An expected surge in the platinum price failed to materialize in 2014 because of a strong U.S. dollar and weak South African rand, say mining analysts with CIBC World Markets, who are slashing their platinum price forecast for 2015.

Despite a more than five-month-long strike by platinum miners earlier this year in South Africa, platinum prices have declined by 7% from the start of the year, from US$1,400 per oz. to US$1,200.

“Having had an almost six-month break in at least 60% of the South African supply base and still looking at lower prices was simply not expected,” CIBC mining analysts Leon Esterhuizen, Arnold Van Graan and Ben McEwen say in a Nov. 19 report.

South Africa is the world’s biggest platinum miner.

The analysts have downgraded the entire platinum group metals (PGM) sector to “market weight” from “overweight,” noting it has been “a great disappointment” this year.

“Our sector overweight call was premised on significant output reduction and a high probability for supply disruption, but the unfortunate spoiler, which we highlighted as a possible problem earlier, was the currency.”

The weak rand allowed several marginal platinum mines to remain open, counteracting the effect of the strike on mine supply, the report says.

As a result, CIBC has slashed its 2015 price forecast for platinum by 26% to US$1,250 per oz. from US$1,700.

The picture improves somewhat in 2016, with a forecast of US$1,350 per oz. platinum, down from a previous call of US$1,600.

The long-term forecast for the metal remains unchanged at US$1,400 per oz.

While the analysts note that palladium is the preferred PGM and remains in deficit, they explain that platinum production should soon reach 2013 levels, when the metal was in oversupply.

“All hope is not lost, though, as we believe the excessive harm done by the long strike will likely see some production cuts (again, critically dependent on the exchange rate movement) and demand is not expected to decline,” reads the report.

“The biggest risk factor on the demand side now, in our opinion, is the relatively large amounts of metal that have been building into the mountainous ETF positions — all on the back of a much stronger expected run in PGM prices. Even if these investment flows just stop this year (not even talking of potential selling yet), then we believe platinum is going to have a tough time lifting its head too much.”

For palladium, CIBC has revised its 2015 forecast price to US$850 per oz. (down from US$1,000), and has left its 2016 prediction at US$900 (unchanged), while raising its long-term forecast to US$800 (up from US$700). Its rhodium forecast for 2015 and 2016 are the same at US$1,200 per oz., and its long-term prediction remains at US$1,000.

A PGM price rally is possible going into 2017, the analysts say, but only if supply is finally cut.

In terms of PGM miners, the analysts recommend Stillwater Mining (TSX: SWC.U; NYSE: SWC) as “the only logical investable option,” being both exposed to the palladium and not exposed to South Africa. They have an “outperform” rating on the stock and a US$16.50 target price.

Of the South African PGM miners, the analysts deem Royal Bafokeng Platinum as the best-positioned, with a “sector outperform” rating and a ZAR85 target.

They rate Anglo Plati-num(US-OTC: AAUKY), Lonmin (LSE: LMI) and Aquarius Platinum (LSE: AQP) as “sector outperformers,” noting the latter two are high-risk recommendations that “will do exceptionally badly in a declining metal-price environment.”