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Platinum and Palladium Cartel

Russia and South Africa Control Platinum Metals


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By Swagato Chakravorty
Wednesday, April 3rd, 2013

The precious metals market could be in for some major shifts. Russia and South Africa today control around 90 percent of the world’s platinum supply and hold 80% of the world's platinum-group reserves, and they may work together to create a trading bloc — a la OPEC — to limit the flow of precious metals exports.

Durban, South Africa hosted this year's BRICS summit, and last Tuesday, Russia’s Vladimir Putin and South Africa’s President Zuma entered into a memorandum of understanding to work toward regulating the world’s supply of platinum.

The result would be a market regulatory body inspired by OPEC, which (in)famously controls the world’s oil supplies.

From RT.com:

“Our goal is to coordinate our actions accordingly to expand the markets for realization of these metals,” Russian Natural Resources Minister Sergey Donskoy told Bloomberg. “The price depends on the structure of the market and we will form the structure of the market.”

platinum palladiumSuch a joint effort would purportedly bring additional stability to the precious metals market while also increasing direct control over pricing. Both countries stand to profit enormously, of course, and it appears that other major platinum producers would be invited to join the consortium further down the line.

A weak European auto market meant platinum went down 21 percent over 2012; however, so far this year prices have gone up 2.7 percent with the general easing (even if mild) of the Eurozone financial troubles. As well, a U.S. recovery has meant good things, as has an increased demand for auto sales.

Last week, platinum prices hovered around $1,572.60, which is just above the year’s average (between $1,380 and $1,740). Platinum and palladium prices both have dropped off their high points, which were reached in February this year, as RT.com reports.

The OPEC of Platinum and Palladium

Such a consortium would, however, almost inevitably lead to a rise in prices. Last year, for example, South Africa produced 34 percent of all the world’s palladium; Russia produced 43 percent. In other words, they produced 86 tons and 25 tons of palladium and platinum.

A consortium between these two, then, would effectively make these two countries “price-setters” of a sort. That’s what Interactive Investor says:

"That will eventually create a higher level of stability in an otherwise more volatile pricing market," he [Paul Renken, mining analyst at VSA Capital] adds. "They would become 'price setters' of these metals."

While there probably won’t be any sharp increases in prices, the increased stability will lead to a general rise across the board in prices over the long term.

From Interactive Investor:

Anne-Laure Tremblay, precious metals analyst at BNP Paribas, agrees. "Theoretically, if Russia and South Africa join forces and decide on a monthly basis or a quarterly basis how much stock or how much of the metals they are going to release over a certain period of time they would effectively manipulate prices, which OPEC does for oil prices."

The terms of the proposed agreement mean that governments would first pay the producing companies and subsequently release stocks on the general market on a given date, Interactive Investor reports. What this means is they’d be paid only after the platinum group metals have been sold.

Countries besides these two are expected to join, with Zimbabwe being a key contender. That country produces nearly 2 percent of the world’s platinum.

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Effects on Prices

In general, production companies would begin to see more money for their production. Small producers, such as Sylvania Platinum (ASX: SLP) or Aquarius Platinum (ASX: AQP), won’t really see much of a change at all.

But U.S. and Canada-based producers, which cannot participate due to anti-monopoly legislation in those nations, would find the competition stiffened quite a bit.

Moreover, automotive companies in Europe and Japan would begin to see higher production costs (platinum and palladium are used commonly in the manufacture of catalytic converters).

It seems to be a mixed deal. On the one hand, the precious metals market would benefit from longer-term stability, but on the other hand, not only would prices go up, but other dependent industries would see a spreading impact.

While higher PGM prices in companies actively involved in mining would certainly help the mining sector (as far as wages and work conditions go), it’s the wider impact that seems to be concerning analysts.

 

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