Platinum Group Metals: How could Zimbabwe's economic chaos hit PGMs?

Zimbabwe is currently going through a severe economic crisis, with COVID-19 cases on the rise, as well as crippling hyperinflation and slowing economic growth. Furthermore, the country faces the threatening risk of a looming coup, due to unrest following a few electoral appointments back in August 2021.

The last coup was seen in November 2017, when Emmerson Mnangagwa ousted the country’s first president, Robert Mugabe.

Zimbabwe is the third-largest producer of platinum worldwide and the fifth-largest producer of palladium, as well as being the third-largest producer of platinum group metals (PGMs) worldwide. This has led to investors speculating that the country’s current economic crisis could potentially propel the PGM market further into deficit this year.

How might Zimbabwe’s economic crisis impact PGM markets?

According to this US Geological Survey (USGS) report, Zimbabwe produced about 13,000kgs of palladium in 2021, as well as about 15,000kgs of platinum in the same year, with total PGM reserves estimated to be around 1,200,000kgs.

Along with that, Zimbabwe produces around 40 other metals and minerals, namely gold, chrome, diamonds and coal amongst others. However, the country has historically had an unstable socio-economic environment, ever since its independence from British colonisation in 1980.

This has included acute poverty, years of hyperinflation, a consistently devaluing currency as well as human right violations. Contributing to macroeconomic instability were the central bank’s quasi-fiscal policies as well as rampant corruption.

This situation has now been escalated in the past couple of years, due to COVID-19, which has hit developing economies across the world much harder than their developed counterparts. The pandemic has in turn all but closed the few streams of touristic and industrial revenue in the country, especially on the Zambian border at Victoria Falls.

Furthermore, rising corruption in politics has led to considerable unrest, as citizens anticipate that the presidential elections this year may potentially be rigged. This has led to a very high possibility of sudden coups or protests, which could significantly hamper mining. In addition to that, rising taxation and royalties on miners have also taken a toll.

Investors are now concerned that with slowing economic growth worldwide and a number of international institutions such as the International Monetary Fund and the World Bank warning of a mild recession this year, Zimbabwe may struggle to maintain its PGM supply.

This is especially because the country has had to quickly scale up its palladium and platinum supply following the start of the Russia-Ukraine conflict in February 2022, which led to a number of international sanctions on Russia.

The latter, which was once a major producer of PGMs itself, has now faced restrictions on the movements of its goods abroad, with several commodity exchanges such as the London Metals Exchange imposing further sanction on Russian metals trading.

This has led to other major producers such as Zimbabwe and South Africa to step up to fill in the gap left by Russia metals. However, the ongoing global energy crisis has caused further strife in Zimbabwe’s metals and mining industry, with several days of blackouts. As PGM mining is considerably energy-intensive, this continues to threaten supplies.

Moreover, the weakening of the US dollar (DXY) has added additional strain to the economy, due to a number of transactions and payments being made in dollar terms in the country, as a result of a severely devalued currency.

Furthermore, Zimbabwe has been dealing with a water shortage and crisis for the last several years, which also worsens seasonally, dealing another blow to the mining industry. However, there may be a silver lining, as the economy has also developed some resilience, especially through dealing with consistent hyperinflation.

This has caused it to somewhat restrict the impact of hyperinflation on its metals production. Furthermore, cautious signs of economic recovery are also emerging now, although not enough yet to change major economic forecasts.

This includes China resisting bringing back mass lockdowns despite rising COVID-19 cases, as well as investment bank Goldman Sachs (GS) no longer seeing a recession this year.

There has also been a strong rally in metals lately, going some way in giving investors more hope for the commodities future. Moreover, Zimbabwe has also seen record gold production in the last year, at a little over 35 tonnes.

Platinum technical analysis

At the time of writing, platinum prices were trading at about $1,063 per troy ounce, quite close to the critical psychological barrier of $1,100. The precious metal has rallied almost 9% since the end of December, as well as about 29% since the beginning of September.

However, it is still trading almost 10% down from its early-March 2022 highs, following Russia being heavily sanctioned by the international community and its metals being banned on a number of exchanges.

Coming to the next resistance level, it is likely to be the $1,100 per troy ounce mark, followed by the $1,150 per troy ounce mark, both last seen on March 9. The next support level however, is likely to be around $1,000, last seen on December 23, followed by the $980 per troy ounce mark, last crossed on November 28.

What is the outlook for PGMs in 2023?

The PGM outlook for 2023 will depend heavily on whether we actually see a recession this year or not. If we do, Chinese demand is likely to reduce considerably, causing a loss for platinum and palladium demand from the automobile and other industries.

Furthermore, whether we see inflation finally come under control as a result of the US Federal Reserve’s continued monetary tightening is also a concern, as continued higher interest rates will definitely take a toll on precious metal prices.

Similarly, a rebounding US dollar would also dampen PGM prices. Investors are also keeping an eye on global economic growth forecasts, which are likely to affect both supply and demand dynamics. Protests, labour union issues and social unrest are also factors to be watched, as they are very common in major PGM supplying countries such as South Africa and Zimbabwe.