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Could PGM prices relapse in 2021?

Covid infections are rising sharply in South Africa. The government tightened restrictions in late December to Level 3, aiming to balance keeping the economy open (limiting business closures) while reducing transmission. The concern is that mines will be closed down again if the situation worsens.

Mine closures look less likely than last year. In March last year the lockdown was at Level 5 when underground mines were initially closed. However, the government shifted to a less strict Level 3 owing to the adverse economic impact of the full lockdown. Mines were allowed to return to full operation with safety protocols in place, even though the number of coronavirus cases was increasing. The mining companies did very well at managing the safety of their workers during the first outbreak. It seems likely that the government would shut mines again only as a last resort.

Restrictions are being tightened worldwide. The vaccine rollout has not begun soon enough to avoid more restrictions on consumers and businesses. They are being increased in parts of the US and Europe, and Japan is also considering tightening its restrictions. China is the largest source of PGM demand but even if infections there remain low, the country cannot avoid a negative impact on its economy if its largest trading partners are shutting down again. That does not bode well for PGM demand.

A weaker economy means a weaker rand and lower platinum price. There is a strong negative correlation between the platinum price and the rand. The rand weakened sharply in Q1’20 as a struggling South African economy was put
into lockdown and risk aversion drove up the dollar. This reversed in H2’20 and the dollar is now oversold. Even if the economic slowdown is not as severe as last year, a more risk-averse backdrop could see the rand weaken again and drag down the platinum price. That said, the platinum price this year is still expected to be higher on average than last year.

Expect more price volatility. In the short term, the metals with the tightest markets could have their high prices supported as it will take some time for Anglo’s refined output to return to normal levels once the Anglo Converter Plant (ACP) is fully operational. However, the second wave of lockdowns will prove detrimental to economic activity, so PGM demand in 2021 may not rebound as strongly as anticipated.

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