Platinum and palladium prices have posted the steepest losses in months after companies that mine the metals took a step toward ending a worker strike in South Africa.
Platinum for July delivery, the most active contract, on Monday fell two per cent, the biggest one-day percentage loss since the strike began on January 23. The contract ended down $US28 at $US1,400.70 a troy ounce on the New York Mercantile Exchange, the lowest price in nearly a month.
Palladium for June delivery fell 3.6 per cent, its steepest drop since June 26, and settled at a one-week low of $US777.80 an ounce.
Monday was the first day traders could react to the decision by the three biggest platinum producers in South Africa to offer larger pay increases with the aim of ending the 12-week strike. Anglo American Platinum, Impala Platinum Holdings and Lonmin PLC made the announcement Friday, when the metals markets in London and New York were closed.
"The price fall reflects thoughts of supply coming back on line," said Adam Klopfenstein, a senior market strategist with Archer Financial Services, Inc, a futures brokerage in Chicago.
But those supplies will take time to reach the market, Klopfenstein said. It can take weeks or even months for a platinum mine to ramp up to full production after a long break.
"Anyone who thinks supply is going to come on strong again is making a mistake. Platinum is overshooting the news," he said.
About 80,000 workers are on strike in South Africa, which accounts for about 80 per cent of the world's platinum supply and roughly a third of the world's palladium, because the two metals are often found and mined together. While the affected mines have been able to produce the metals by processing ore that was mined before the strike, the ore stockpiles are running low. Friday's offer marked a sign of progress in the negotiations to end the strike.
The market's reaction assumes the union will accept the deal, said Bart Melek, senior commodities strategist with TD Securities in Toronto. It also fails to account for the impact of the protracted production halt on expected mine supply, he said.
Before the strike, demand for platinum and palladium was already expected to exceed the metal produced by mines and by recycling. Platinum and palladium are mainly used in car-exhaust filters, and demand for the metals has been buoyed by a rebound in global auto sales, Melek said.
The strike has reduced production, and now the shortages will be more pronounced. Melek forecasts platinum supply to lag behind demand by one million troy ounces this year, while palladium supply will fall short by 1.6 million troy ounces.
Union leaders are due to resume talks with mining company representatives on Tuesday. The head of the Association of Mineworkers and Construction Union, Jeffrey Mphahlele, told The Wall Street Journal that the latest offer falls short of the original demand for a basic monthly wage of 12,000 South African rand ($A1,225.55).
"It's not an improved offer," Mphahlele said. "It's like a rubber band. You can stretch it, but when you let go, it returns to the same shape," he said.
Some investors expect the rally in platinum and palladium to resume. The price of palladium is up 8.3 per cent this year and platinum has gained 2.1 per cent.
"Over time, the market will respond to the supply and demand dynamics that have shifted as a result of these strikes," said Steven Allen, managing member with the $30 million Greenbriar Partners LP, a hedge fund active in commodities in Chicago.
Allen said he has been buying an industrial form of platinum, known as sponge, from trading houses as he anticipates a shortage of the metal will drive up platinum prices.
"When there's actually a shortage of material, there's going to be a premium placed on the sponge, because that's what the commercial end-users want," Allen said.
Sponge is platinum in the form of grains of metal that look like dust. This can easily be applied to car-exhaust filters during the manufacturing process.
For palladium, the metal has received an added boost from the conflict in Ukraine. Traders are concerned that the US and Europe will impose sanctions against Russia that will affect palladium supplies. Russia accounts for 42 per cent of global palladium production.
"Even the perceived threat of having 50,000 Russian troops on the Ukrainian border is enough to keep the palladium price elevated," said Claudio Oliveira, head of trading with hedge fund Castlestone Management LLC based in Jersey City, New Jersey. The firm manages about $US70 million in assets, including a fund that buys platinum and palladium.
Gold prices also moved lower on Monday, with futures closing at the lowest level in more than two weeks as some investors worried that progress in diplomatic talks between Russia and the West would erode demand for the haven asset.
Gold for June delivery fell $US5.40, or 0.4 per cent, to settle at $US1,288.50 a troy ounce on the Comex division of the Nymex.
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