EasyAssetManagement highlights the robust demand for gold among central banks and a promising outlook for platinum, supported by supply deficits and macroeconomic drivers. Impala Platinum's strategic projects and growth potential in Zimbabwe position it well for future gains, despite economic and operational challenges. South Africa's GDP growth faces headwinds from manufacturing sector declines but may benefit from improvements in the energy sector.
Key Points:
- Gold: Central banks continued increasing gold purchases in early 2024, with 290 tonnes bought in Q1. This marks one of the strongest quarters for central bank gold acquisitions.
- Platinum: The outlook for platinum in 2024 is positive, supported by favorable macroeconomic factors tied to gold and potential Fed interest rate cuts. This has led to a stronger-than-expected gold price rally.
- Impala Platinum Holdings Limited has initiated several projects to boost low-cost production,These initiatives aim to improve cost competitiveness and sustainability. The company is well-positioned for a metals price recovery, with strong EBITDA leverage and relatively low trading multiples.
- Energy Sector: Improvements in the energy sector, including fewer power cuts and better coal plant performance, are expected to bolster GDP growth in Q2 2024. The private sector's adoption of alternative energy sources is also helping alleviate pressure on the national grid.
South Africa's 1Q24 GDP Growth Tendency Towards the Downside
The anticipated increase in manufacturing output that the market expected did not materialize fully in the first quarter. In the fourth quarter of 2023, the sector failed to rebound from the 4.9% quarter-on-quarter seasonally adjusted annual rate (q/q saar) decline experienced in the third quarter, managing only a modest 0.8% increase. The markets had expected a stronger recovery in the last quarter. However, instead, markets now estimate that manufacturing production plummeted by 3.7% q/q saar in the first quarter, following an unexpected 2.2% decline in March. The petroleum, metals, and vehicle manufacturing sectors saw the most significant output losses. Various factors contributed to this slump, including the shutdown of two plants by the automotive giant Toyota.
In the future, the capacity for supply stands to gain from the gradual improvements observed in the energy sector. Compared to 2023, there has been a decrease in the severity of load shedding, with no power cuts reported in April, which is expected to bolster second-quarter GDP. Although one might attribute this to the forthcoming elections, the private sector's adoption of alternative energy sources is also playing a role in alleviating pressure on the national grid (Figure 1). Furthermore, energy accessibility has enhanced over recent weeks due to fewer breakdowns in plants, facilitated by cooler weather that has improved the performance of coal plants. (Figure 2)
Rise Enhanced Portfolio Movements
Impala Platinum Holdings Limited
Markets are constructive on the outlook for platinum in 2024 supported by a 218koz deficit, plus macro precious metals drivers tied to gold & a Fed cutting cycle, with the recent gold price rally coming through earlier and stronger vs previous expectations.
Impala Platinum, among the leading global producers of platinum group metals (PGM), contributes roughly 20% to the worldwide refined PGM output.
Predominantly situated in South Africa, it currently derives approximately 65% of its production (in concentrate) from there, with about 25% sourced from operations in Zimbabwe and the remaining from Canada.
Zimbabwe is seen as offering strategic potential for low-cost growth for Impala Platinum in the long run. Over the past 2-3 years, Impala has unveiled various projects aimed at boosting low-cost production, particularly at Zimplats and Two Rivers, while also focusing on enhancing asset reliability and expanding smelting capacity/refineries.
These initiatives are expected to enhance the company's cost competitiveness and sustainability. Additionally, the anticipated benefits from the RBP acquisition are likely to materialize in the coming years.
Collectively, these factors are poised to enhance the company's return on invested capital and return on equity, potentially prompting a revaluation of the company.
Macroeconomic developments affecting PGM prices and exchange rates, operational risks that might affect volumes and input costs, political and regulatory risks that might affect costs and the company's reputation and risks associated with power outages.
When it comes to operational risk a large risk is that more capex is required to sustain current production levels than is assumed. Other operational risks include IMP failing to contain costs of lease, and a deterioration in political conditions in Zimbabwe, which could prevent further growth for IMP in that country.
Downside risk to PGM supply & strong gold price momentum sets the stage for a potential recovery in the platinum price (-2% YTD, +6% 1-month). Among South Africa Platinum Group Metals (“PGM”) producers, Impala has the highest EBITDA leverage into a metals price recovery. IMP screens relatively cheap on near-term trading multiples (3.8x/2.8x 2024/25E EV/EBITDA, 4.8x/4.1x peer avg) & has a relatively robust net cash B/S, even if spot metals price momentum stagnates or deteriorates.
Central Bank Gold Demand
Central banks continued their trend of increasing gold purchases in the first quarter of 2024. This ongoing shift in gold ownership away from traditional investors, such as through ETFs, towards emerging markets central banks aiming to diversify away from the US dollar, represents one of six significant structural shifts bolstering commodity markets. Following net central bank gold acquisitions of 1,082 tonnes in 2022 and 1,037 tonnes in 2023, 2024 has shown a robust start, with recent data from the World Gold Council indicating that central banks collectively bought 290 tonnes in the first quarter of 2024.
This marks the fourth strongest quarter of purchases since the trend began in 2022. Notably, reported central bank gold purchases, which accounted for approximately 30% of the WGC/Metals Focus full quarter estimate at 80 tonnes, revealed that the most significant buying activity occurred in January, representing about 60% of the total reported acquisitions for the first quarter of 2024. Among the countries reported as purchasers in the first quarter of 2024, Turkey led with 30 tonnes, followed by China with 27 tonnes, India with 18.5 tonnes, and Kazakhstan with 16 tonnes.
From a structural perspective, markets believe that the price of gold has little influence on long-term central bank acquisition strategies. However, fluctuations in price do seem to impact the speed and rhythm of net purchases.
Against a backdrop of geopolitical tensions, inflation worries, heightened sanctions, and moves away from the US dollar, the uptick in central bank gold acquisitions as a structural trend, propelled by a growing desire to diversify reserves with tangible assets like gold. This assertion is supported by findings from the World Gold Council's 2023 Central Bank Gold Reserves Survey.
Although the results for 2024 are pending, the previous year's survey highlighted interest rate levels, inflation worries, geopolitical uncertainties, and changes in global economic dynamics as among the most significant considerations influencing decisions regarding reserve management (refer to Figure 2).
The emphasis on broader macroeconomic and geopolitical factors is apparent, as reflected in the consistently elevated level of net purchases since 2022, despite a relatively higher gold price compared to the previous decade. While the decision to invest in gold is driven by deeper structural considerations, the timing of these investments seems to be more opportunistic and responsive to price shifts.
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Source: World Gold Council
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