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in China . The resource sector is greatly affected by the Chinese economy . With a strong rebound in China after the damage from their lockdown , it is net positive for the rest of us .
There are a lot of goods which are manufactured in China that end up being exported and consumed elsewhere . They are a big vehicle manufacturer so about 65 % of Platinum Group Metals ( PGMs ) are consumed in China . This is important for the PGM sector .
We are in a familiar situation which we saw at the end of the global financial crisis in 2008 . A good way to get the economy going again is to get people to spend money and that comes down to stimulus and QE and the like . It will not only push money into the system but also revitalise it .
Approximately 70 % of all PGMs produced go into the auto industry and the bulk of that goes directly into China . There was a decline in global vehicle sales pre-Covid-19 which raised questions around the long-term future of the industry . A major disruptor in the industry remains electric-powered vehicles and the impact it will have . This is made more relevant with Tesla ’ s increasing share prices . We need to answer the question of post-Covid recovery and the future of electric vehicles . They go hand-in-hand . The recovery of the auto sector will depend on stimulus measures . We predict a strong recovery in global vehicle sales on the back of stimulus and continued growth out of the global auto sector . There is an increasing need for private transport to avoid using public transport considering Covid-19 . This is a positive for the auto sector in terms of a rebound . There is still the threat of electric vehicles on the horizon and we believe it is not a near threat – not within the next five years , at least . The transition to electric vehicles will be a long-term theme .
Pre-Covid , the PGM market looked good and prices were starting to increase due to a potential shortage of metal , because the industry had been under-capitalised . We have not built enough mines to sustain long-term demands . With the hard lockdown , we will see 15 % of 2020 ’ s production taken offline .
This is a positive , as you are losing supply when there is no demand . The shortages pre-Covid will push through and continue . Platinum tends to be in oversupply , whereas palladium and rhodium will be in deep deficits for the foreseeable future . Our view is that we will see the substitution of palladium into platinum . If we look at it from a basket perspective , we do see these shortages .
Ultimately , we will be discussing the impacts of Covid-19 on the industry for much longer than it will be trending in the news . The ramp-up post-Covid is deliberately slow with mining companies focusing on the health and safety of workers and not production . As a result , most mines only reached a somewhat steady state towards the end of July 2020 . Underground mines sit at 80 % production levels due to social distancing , which results in delays and challenges getting some members back to work . There is always a risk of Covid-19 impacting production on the mines .
“ This is the wonder of resources and mining . When you think it is down and out , you get a bull market .”
Since the 90s there has been a big push to expand offshore . This continued and we saw disinvestment by major listed producers , like Anglo Gold who recently sold their last operations in South Africa . In our research , we found that in the gold sector companies went offshore due to weak papers . But they did not have the buying power to purchase the best assets and ended up buying lower-tier assets in new jurisdictions , different from the mining methods they were used to . The sector spent a lot of money buying lower-tier assets but was not the best at running them , which resulted in a lot of value destruction in the process . While companies are becoming more prudent in their offshore expansions , we are not seeing major deals as we have in the past .
South African companies have become better international operators , not just in mining , but in other sectors too . A cautionary warning to offshore expansion would be to have a thorough understanding of the new jurisdiction , its legislature , its people and ensure you buy the best quality assets – not just buying assets for the sake of buying an asset offshore . This will be key .
Avinash Kalkerpersad is head research analyst , and Arnold van Graan is equity research analyst at Nedbank . •
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