Power supply issues in South Africa have led to a very interesting opportunity for risk-embracing investors – and potentially very large headaches for auto manufacturers.
At a time when metals have been the hottest properties on the sizzling commodities markets, platinum has emerged as the flavor of the month, with prices hitting historic highs and some analysts projecting more spikes to come.
The reason: mines in South Africa have been hit with rolling blackouts after power disturbances in the country last month. The result has been a sharp drop in platinum supply, while demand escalates.
Spot platinum hit another record high Friday near $2,200 an ounce before profit takers moved in to send the price lower. Until the situation in South Africa, which produces 75 percent of the world’s platinum, gets straightened out, the end may not be in sight.
"That just sent a shockwave through the platinum market," said Jeffrey Christian, an analyst at CPM Group. "It's a fundamentally driven issue. One of the fundamentals is you have a very small, illiquid market and a lot of investors pouring into it. That's really what's been going on there."
The news certainly has been good for investors willing to take a risk on always-volatile futures markets, with some analysts believing platinum is on its way to $3,000. But the situation with platinum lines up as a huge problem for auto manufacturers, who use the metal to make catalytic converters.
The issue is especially acute for those that make diesel vehicles. Manufacturers can substitute palladium for non-diesel converters, but not for diesel ones.
"You might not have at any price the platinum for the catalytic converters required for automobiles," Dennis Gartman, of the Gartman Letter, said on "Squawk Box." "I’d be very uncomfortable if I was an automobile producer right now."
Getting in on the Action
The converging factors make for several tantalizing market plays right now.
Gartman said he is short on General Motors – meaning he is expecting the stock price to fall – because of the platinum issues. Shares of all the auto majors were lower Friday.
Yet analysts generally try to dissuade retail investors from playing futures contracts in the commodities.
Risk in the trades is high, not only due to price volatility, but also because there's a much greater opportunity for loss. Futures traders are required to post margin covers up front, but can lose far more than their initial investment if the price drops substantially. And in platinum particularly, the margin requirement to hold a contract has risen substantially because of the volatility – from $3,000 to $5,768.
Platinum also is different in that it doesn’t trade as far in the future as other commodities, such as oil. Most of the platinum money right now is on the April contract, with very few orders placed beyond that.
Less Risk in Gold?
And there are some who are doubtful as to whether platinum will see additional major price spikes. Sean Brodrick, the natural resource analyst for Money & Markets, prefers gold now.
"Platinum already had its explosive move," Brodrick said. "You can already see (its chart) looks like a rocket ship taking off. Gold, on the other hand, has been compressing since last year. Therefore, there’s less risk in investing in gold right now.”
There also are ETFs that investors can look to if they are averse to buying contracts, though they aren't always as accessible as some other funds.
The London Stock Exchange has the PHPP fund, which mimics platinum's movements, while the Rogers International Commodity fund is weighted 8.5 percent toward platinum. By contrast, the Gold Shares fund more precisely reflects gold prices.
PHPP investors are on their way to grabbing up to a million ounces of platinum by the fourth quarter, something that could act as a major drive on prices, Brodrick said.
Investors also can play companies that use platinum, including Stillwater Mining and North American Palladium .
"I think the demand from auto manufacturers is pretty steady. How much money is going to into the (PHPP) ETF, that's the wild card," Brodrick said. "That's the kind of thing that's given it the kind of velocity we’ve seen recently."
Still, money managers are hesitant to steer their less sophisticated clients toward the platinum trade.
"In all honestly, I think the range in platinum prices over the next six months will be between $1,600 and $2,500, so that’s an extremely volatile market," said Christian, of CPM Group. "It’s not the kind place where you invest."