Platinum: Understanding the Rationale for Commodity Supply Risk

In a few weeks time, Spend Matters and MetalMiner will be hosting Commodity EDGE, a conference dedicated to examining strategies for combating economic and commodity volatility and risk in the terms of sourcing and supply chain. Most of the time, when one considers commodity risk, the central theme is price volatility rather than the underlying dynamics of supply, demand and lead-time. However, with China's actions in 2011 temporarily cutting off the supply of rare earth metals to certain markets, the question of availability and ability to fill orders even came into question (let alone price, which was off the charts). A recent article we came across in the area of precious metals profiles underlying supply risk characteristics of platinum and is a great example of how to dissect an underlying supply market, considering nearly all underlying risk factors.

The article in question, from Resource Investing News, quotes a British Geological Survey to reference underlying platinum supply and risk characteristics. Compared with other base metals and minerals that the study lists, of a total of 52 items, "platinum group elements are among the four with an 8.5 out of 10 rating on the index, which marks them as very high at risk," according to the analysis. The article suggests platinum's industrial applications extend beyond its frequent references for catalytic convertors/emission systems and jewelry to hard drives, LCD monitors, explosives, fertilizers and pharmaceuticals.

But why is platinum so risky? For one, "though it is often grouped with other precious metals, platinum is the rarest." The second key risk factor is production concentration. Today, South Africa represents "80 percent of the global platinum production" and "Russia provided 11 percent and another 4 percent came from Zimbabwe." Moreover, production declined in 2009 and the risk of labor issues, "safety stoppages and geological issues" from a single country figure prominently in driving underlying commodity risk. In addition, production costs are "getting more expensive and requiring deeper digging" and general country "governance" owing to the chance of destabilization or overthrow are material in Russia and South Africa (global ranks of 18 and 44.3 respectively, according to a World Bank reference in the article).

The risk factors underlying platinum represent a great use case for evaluating other base metals and commodities for supply risk extending beyond current price volatility. If you're curious about this subject in general and how to put in place risk mitigation programs across your commodity spend, come to Commodity EDGE to learn more about the topic.

Disclosure: Jason Busch is long PPLT (ETFS Physical Platinum).

- Jason Busch

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