PGM Investors Should Not Ignore Zimbabwe

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"The PGMs sector is a prime example where higher government taxes and ownership policies can materially impact future platinum and palladium prices."

Bart Melek, head of commodity strategy for TD Securities, expects platinum to move into deficit by 2013, with palladium deficits to deepen over the next three years.

"The PGMs sector is a prime example where higher government taxes and ownership policies can materially impact future platinum and palladium prices," he noted in recent research report.

Nevertheless, Melek warned the indifference of platinum and palladium markets toward "Zimbabwe's rising resource nationalism. . .could very well be a mistake."

"More robust government ownership and higher taxes tend to increase the costs structure and life risk, which increases the required rate of return on invested capital," he advised.

Given TDS projections of a tightening platinum market with a deficit by 2013, Melek fears, "even a small reduction in new capacity in Zimbabwe can bring this market into a deficit much earlier than planned."

"Less production growth due to uncertainty in South Africa's business climate would no doubt send this market into a chronic deficit and prices surging in fairly quick order."

"Palladium looks to be in deficit as early as this year, with the imbalance expected to increasingly tilt towards the demand side into 2013," Melek forecast. "Here again politically induced output growth reductions would tighten the already tight market. As such even a marginal decline in production growth may life prices sharply."

Meanwhile, Melek noted that the PGM sector is facing a high currency environment "and power problems that serve as impediments to production growth and factors pushing cash-costs higher, which are very likely to lift PGMs prices into 2012."

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