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GFMS: Big Production Cost Increases for Platinum Miners

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". . .sustained high prices may undermine prospects for continued demand improvement."

Investors were the primary drivers behind the rising prices of platinum and palladium, according to the latest GFMS' survey. Platinum sustained a surplus last year (before ETF investment is taken into account) of 849,000 oz.—and that once industry destocking and ETF investments are considered, this surplus rises to 1.07 million oz. This compares with industrial and retail investment demand of 6.4 million oz. and, therefore, implies that aboveground stocks increased last year by the equivalent of almost nine weeks' industrial demand.

Palladium was finely balanced last year, with a very small global deficit of 12,000 oz.—though once the estimated shipments of 1.1 million oz. from Russian State inventories, along with ETF investments, are accounted for, then the market was in a residual surplus of 582,000 oz.; this is equivalent to four weeks' global industrial demand.

GFMS. . .warns that sustained high prices may well undermine the prospects for continued improvement in demand.

Faced with their notional surpluses last year, the performance of both metals' prices was impressive.

GFMS is expecting platinum to sustain another gross surplus this year and, though this is likely to be smaller than that of 2009, the absolute level will be highly dependent on the reaction in the jewelry and retail investment sector to high prices. Palladium's gross deficit is expected to grow again this year, but not to reach the level of 2008.

Global average production costs rose 23% YOY in 2009, due largely to reduced platinum equivalent production; and cash costs rose to more than $870/oz. In South Africa the increase was more than 25%.

In mid-2010, the GFMS group will be releasing its new detailed PGM Mine economics study and includes some of the new methodology in this latest survey, including its new "all-in" cost parameter, which accounts also for extraneous costs such as corporate overheads and mine site exploration. The resulting figure suggests that, despite substantial reductions in capex, margins on all-in costs have been "lean at best," while the cost curve in the survey suggests that over half the industry was loss making for the year as a whole.

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