Platinum glut diminishing as bear market approaches

May 29 (Bloomberg) -- The first drop in platinum mine supply in four years and record car sales, the biggest source of demand, are reducing a surplus of the metal and shoring up prices on the brink of a bear market.

Output will drop 4 percent to 6.14 million ounces this year as labor strikes and safety concerns disrupt mining in South Africa, the biggest producer, Barclays Plc estimates. That will diminish the annual glut by 90 percent to 37,000 ounces, the bank predicts. Prices will average $1,750 an ounce in the fourth quarter, 22 percent more than now, the median of 13 analyst estimates compiled by Bloomberg shows.

The metal, used to make autocatalysts and jewelry, slid 16 percent in the past three months and hedge funds are now their least bullish since at least 2009 on speculation that slower global economic growth will curb demand. Prices are now within about 1 percentage point of average production costs, which continue to rise as companies dig as deep as 1.3 miles to find ore and face surging wage and energy bills.

“Platinum is very, very cheap at the moment,” said Thorsten Proettel, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany and the third-most accurate forecaster of platinum prices in Bloomberg Rankings in the two years through December. “It’s more the supply side which could help the platinum price accelerate because supply is very tight.”

Bear Market

The metal’s 17 percent plunge to $1,436.50 since late February leaves it within 3 percentage points of the common definition of a bear market. The slump pared this year’s gain to 2.5 percent, still beating the performance of gold, silver and palladium. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 3.7 percent since the start of January and the MSCI All-Country World Index of equities rose 0.7 percent. Treasuries returned 1.2 percent, a Bank of America Corp. index shows.

It costs an average $1,437 to extract an ounce of platinum, according to Proettel. The slide in prices is eroding earnings, discouraging the development of new mines or expansions. Impala Platinum Holdings Ltd., the second-biggest producer, will report a 21 percent drop in net income in 2012 while London-based Lonmin Plc, the third largest, will make 76 percent less profit in its fiscal year ending in September, analysts estimates compiled by Bloomberg show.

Hedge funds and other large speculators cut wagers on a rally by 70 percent to 6,200 U.S. futures and options in the three months through May 22, according to Commodity Futures Trading Commission data. Holdings in exchange-traded products backed by the metal dropped 11 percent to 41.1 metric tons valued at $1.9 billion since September, data compiled by Bloomberg show.

Electrical Goods

Rebounding prices may encourage more recycling, compensating for the decline in mine output. Scrap supply from autocatalysts, electrical goods and jewelry reached a record 2.05 million ounces last year, from 565,000 ounces in 2002, according to Johnson Matthey Plc, the maker of about one in three of all autocatalysts. Prices averaged an all-time high of $1,721 last year, compared with $541 in 2002.

The surge is encouraging carmakers to use more palladium in autocatalysts, canisters that have honeycomb-like surfaces and convert emissions into less harmful substances. Platinum’s sister metal is trading at $603.50 an ounce. Palladium accounted for about 30 percent of the metal loaded into catalytic converters for diesel-power vehicles last year, up from 20 percent in 2009, London-based Johnson Matthey estimates.

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