While the nationwide lockdown in South Africa presented a supply response through forced capacity closures, the deteriorating demand fundamentals could tip the platinum group metals (PGMs) into surplus territory with a near-term recovery unlikely, according to Renaissance Capital
The team do not believe the elevated PGM price environment is sustainable and are therefore cautious on the sector despite the optically inexpensive-looking spot valuation multiples.
Impact of the lockdown on the PGM miners
The team forecast 1H20 SA PGM sales volumes will be negatively impacted by 21 per cent, which equates to approximately 700koz on a three PGM basis. However, the impact could be more severe than forecast if lockdowns are extended or mines must close due to the prevalence of COVID-19.
Amplats is the least affected by the lockdown as volumes were already impacted by the Anglo Converter Plant (ACP) outage. Northam’s and Implats’ declines are slightly offset by the drawdown of in-process inventory, while RBPlat and Sibanye are impacted the most due to their exposure to deep-level, labour-intensive SA operations.
Assuming costs remain broadly unchanged over the period, we calculate sector EBITDA will decline by 44 per cent in 1H20, equating to around US$2.01bn in lost EBITDA with the more marginal, labour-intensive miners with limited in-process inventory being the most severely impacted.
Capacity closures not enough to offset demand destruction
The team forecast a 10 per cent decline YoY in 2020 three PGM supply as a result of the SA lockdown. However, we believe 2020 three PGM net demand could decline 28 per cent YoY pushing the market into a potential surplus for platinum, palladium and rhodium.
Sector only looks inexpensive if elevated price environment holds
The team continue to see downside risk to the PGM basket price which is still trading above cost support. While it calculates the PGM miners are inexpensive if spot commodity prices prevail, we struggle to see how a spot basket price that is likely to result in record earnings for the sector and that is more elevated than our calculated incentive price (10 per cent IRR on greenfield projects) could be sustainable.
