It comes as little surprise that Lonmin (LSE: LMI) has started the new year in the same manner as it left off in 2015.
Sure, the platinum group metal (or PGM) producer may have stomped higher in end-of-week trade — Lonmin was recently 18% higher from Thursday’s close — but the business has seen its value fall by more than half since the turn of January.
However, many investors believe Lonmin may be on the cusp of a strong recovery following the colossal cash-raising measures announced late last year. So what are the chances of a solid rebound?
Asian purchases rise
Well, market bulls took heart after Japan’s largest bullion dealer Tanaka Kikinzoku Kogyo estimated this week that platinum imports into the country more than trebled in 2015, to 537,946 ounces. This is the highest level on record, Reuters reported, as hungry bargain hunters piled into the metal — platinum prices fell 27% during the course of last year.
As a result of this buoyant buying activity, metals refiner Johnson Matthey has upscaled its deficit forecasts for the metal for 2015. The business now expects a material shortfall of 702,000 ounces, up from its November estimate of some 652,000 ounces.
However, this brief demand upswing is not a sign of strong underlying demand, naturally, and thereforedoes not represent a sign for investors to pile into the likes of Lonmin.
Dollar set to stagnate?
But platinum prices could theoretically advance should rising pessimism concerning further Federal Reserve rate hikes stem the steady rise of the US dollar.
The impact of monetary tightening has weighed heavily on commodities of all classes over the past year, with forecasts pointing to a further three rate rises on top of December’s increase. But with US inflation falling 0.1% last month — and recent datasets suggesting the world’s number one economy is cooling down — further Fed action may not be an inevitability after all.
There may be trouble ahead…
Still, I reckon the greenback should remain well bought during the course of 2016 and potentially beyond. A shaking global economy is likely to keep ‘safe-haven’ purchases of the dollar in fashion, while loosening monetary policies elsewhere should also keep the currency on an upward keel.
A rapidly-declining South African rand has of course already added to the revenues pressures at Lonmin in recent times. The currency fell to fresh record lows against the greenback earlier in January, and I reckon additional weakness can be expected as commodity prices keep on tanking.
And of course the uncertainty surrounding the future of the diesel market — the bedrock of the platinum market — looks likely to keep the pressure on Lonmin’s earnings as the car emissions scandal spreads. Falling auto sales due to the faltering global economy are already casting a long shadow over the mining play’s sales forecasts.
With platinum jewellery demand also on the back foot, prices of the precious metal ploughed fresh seven-year troughs around $815 per ounce earlier in January. And I do not believe there is enough fuel in the tank for metal prices to gallop higher any time soon, a worrying omen for cash-strapped producers like Lonmin.