Still Waters Run Cars

There’s tons happening in the metals markets that’s worthy of comment, and a great deal of it meshes with our current interest in China.  Unfortunately, we haven’t the space to deal with it all, so we’re focusing today on one significant aspect only, platinum.

Platinum for the last five years looks like this:

Platinum was clearly oversold in the panic that seized world markets halfway through 2008.  Because it’s an industrial metal, and not just ‘precious money’ like gold, platinum investors understood that demand for the metal had to drop along with demand for autos and jewellery, toward which the great bulk of the stuff is directed.  They promptly sold -  and kept selling.

But as the chart shows, the selling went too far, prompting the smarter guys to jump in just above $800 an ounce.  Since then, that same smart set has seen profits double as platinum – and the world auto market – proved itself more resilient than the herd expected.  After a hiatus of a year and a half, platinum has now retraced to its previous growth trend (black line on chart above).

[The following is reprinted from Oakshire’s Charts of the Week, with thanks to editor, Hugh L. O’Haynew for its use.]

The following chart shows just how strong the auto market is.  It portrays car production in the world’s three largest manufacturing nations, the U.S., Japan and China for the last decade (left side), and average current metal usage per car (right side):

Clearly, the Chinese and Japanese auto makers have ramped up production to levels far in excess of those that prevailed pre-recession (bottom two red circles, left), while America has just pushed back to 2008 levels.  That accounts well for the surge in platinum demand (and prices).

Platinum is a Car Manufacturing Metal

Platinum’s primary industrial use is in automobiles – catalytic converters, to be precise.  That’s the mechanism that renders carbon monoxide and a few other toxic gases harmless before they exit the automobile’s exhaust system.  A full 50% of all newly mined platinum is purchased by the auto industry.

With production levels ramping up and tougher environmental legislation now becoming the global norm (even in China), we expect demand for platinum to grow further.

Chinese vehicle demand, too, is on the rise, as is demand on the Indian subcontinent.  The two most populous countries on the planet happen also to possess the two fastest-growing middle classes, all of whom, of course, have to own a car.

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In China, purchases are encouraged through tax incentives and a number of other financing alternatives, which last year led China to overtake the U.S. as the world’s largest car market.

Indian sales numbers have also been growing dramatically.  February 2010 numbers show a month over month increase of better than 33%!

In short, Asian demand is now at staggering levels.  Look at this:

As the chart makes clear: better than 50% of the expected demand for cars in 2010 will come from China alone.  That’s downright remarkable.

Where to invest?

There a number of platinum producers that should benefit from the global auto buying surge.  One is Stillwater Mining Co. (NYSE:SWC), an American producer with operations concentrated in the State of Montana.  Stillwater benefits from being one of North America’s only pure platinum plays.

Stillwater’s chart looks strong:

• Stillwater’s long term trendline (in red) is holding well, and a pennant pattern formed in the past few weeks (in green, on right) is usually indicative of a continuation in trend.  In this case: up.

• Resistance at the $14.50 level should be watched closely.  Any break above would be highly bullish.

• All the moving averages are trending up.

Stillwater is the clear choice of those who have only American stocks to choose from.

Yet the bulk of the world’s platinum is dug out of Russian and South African mines, the latter of which is having increasing problems generating enough electricity to keep production levels at capacity – another reason to expect supply shortages and delays, both of which put upward pressure on prices.

The other option is to purchase one of the platinum bullion ETFs, such as ETFS Physical Platinum Shares (NYSE:PPLT).

Then again, increasing Chinese car production numbers coupled with a dwindling supply of global platinum might tempt China to acquire foreign platinum miners.  The chart below shows a growing number of acquisitions made by emerging market nations like China of developed nations assets.

In the past few years Chinese acquisitions have been focused almost exclusively on U.S. and European resource companies.  Like Stillwater.

Best investing,

Matt McAbby

P.S. – Our writer, Hugh L. O’Haynew, wrote up a premium article weeks ago on the Chinese and Japanese auto-industries growth, and what that means for your portfolio.  Don’t miss out again! Be sure to explore our premium content, available for a limited time for ONLY $1.60 a day! CLICK HERE to sign up before it’s too late!