South Africa's platinum sector, already under pressure from rising costs, labor unrest and falling metal prices, is now facing a rival for investment flows, a major new physical platinum fund with unprecedented levels of demand.
The New Gold Platinum exchange-traded fund (NewPlat) has pulled in more than half a million ounces of metal since its launch three months ago, worth 7.6 billion rand ($780 million) at today's prices.
The fund's holdings currently total more than 543,000 ounces, a level it took the world's largest platinum-backed ETF, New York-based ETFS Physical Platinum, which holds 611,847 ounces of metal, more than two years to achieve.
A great deal of investment in NewPlat, analysts say, has come from funds in South Africa choosing to seek exposure to platinum prices directly through the physical metal, effectively delivering a vote of no-confidence in South Africa's beleaguered mining companies.
While shares in South African platinum producers are felt to be unattractive given the industry's problems, investors have taken account of threats to supply from the mines, and detected tentative first signs of better times ahead for the European motor industry, which uses a lot of platinum in exhaust systems.
"Investors want exposure to the sector, but they are a bit skittish about equities at the moment," Ian Woodley, a portfolio manager at Old Mutual Equities in Cape Town, said. "With an ETF holding, investors don't have to worry about people going on strike in the morning. It's no surprise they've done so well."
Shares in South Africa's platinum miners have slid due to rising costs, falling metal prices and a wave of violent industrial unrest which resulted in dozens of deaths last year.
Shares in Anglo American Platinum, Lonmin and Aquarius have all posted double-digit percentage losses this year, making physical platinum, up 8.8 percent in rand terms, more attractive in comparison.
"For our institutional investors, to have another way of investing in platinum apart from platinum miners was something that they needed," Vladimir Nedeljkovic, head of investments at Absa Capital, which operates the NewPlat ETF, said.
As South African funds can only invest a maximum of 35 percent of the their total assets abroad, existing platinum-backed ETFs, in London, Switzerland and the United States, have been largely closed off to them.
"One can't dispute that the equities have massively underperformed, and that trend is continuing," Justin Froneman, an analyst at SBG Securities in Johannesburg, said. "You've seen a continued outward push from the equities into alternative investments, and the platinum ETF is providing a very real investment alternative."
Investors are drawn to ETFs because they give easy exposure to raw materials without having to take delivery of them.
Worsening labor problems have led mining companies to cut back on investment in new mines, and even to mothball existing capacity. Amplats said in May that it would cut 6,000 South African mining jobs as it tried to restore profits, cutting 250,000 ounces of production this year.
According to a statement released on Monday, the company continued to burn cash in the first six months of 2013, with its Rustenburg mine northwest of Johannesburg losing 1 billion rand. Amplats said it had suspended dividend payments as it continued to face loss-making mines and climbing costs.
Ironically, the pain being felt by the South African platinum miners is one of the issues that has made the platinum ETF, which issues securities backed by stocks of physical metal, such an attractive bet.
Although prices have suffered this year from a slump in bellwether precious metal gold and still-weak demand from European carmakers, threats to supply from South Africa, source of three of every four ounces of platinum, have lent important support.
There are some tentative signs of life in the European auto sector, a major consumer of platinum. Catalyst maker Johnson Matthey said stronger sales of truck catalysts, particularly in Europe ahead of new environmental regulations, sparked a rise in first-quarter profit.
Once the abundant above-ground stocks of platinum that have cushioned prices from the full impact of the new ETF are exhausted, the supply threat to the market is likely to be felt strongly.
It is at this point that the miners are likely to become more attractive again.
"Everyone seems to agree that platinum prices can't remain at these sorts of levels," Investec analyst Marc Elliott said. "It comes down to how much inventory is available to meet demand requirements. That could take a while to work off, but when it does, the platinum price will react strongly, and thereafter the miners will react."
"There will be a crossover point where you will get better leverage owning the equities than you would owning the commodity," he said. "But right now, with the distress that pretty much every single mining company is in, it's certainly better to hold the commodity than the equity."
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