PGM prices declined significantly during the first three months of our 2009 financial year, with Platinum falling to a low of $756 per ounce in October 2008 and Rhodium declining to a low of $1,000 per ounce the following month. The steep decline in these prices was almost entirely as a result of a dramatic deterioration in automotive demand during the period, exacerbated by automotive companies de-stocking, the selling of inventories and investor reaction to the economic downturn.
PGM prices started to improve in the second quarter of the year, stabilising in the following quarter, on the back of strong jewellery and investment demand. Tentative signs of automotive recovery became evident during the fourth quarter of the 2009 financial year, supported by the potentially short term impact of the various fiscal stimulus and scrappage schemes introduced by governments around the world. Consequently, further pricing recovery occurred in that period, with the Platinum price closing at $1,280 per ounce and Rhodium closing at $1,650 per ounce on 30 September 2009.
However, the strength of the South African Rand largely offset these improvements in US dollar based PGM prices, and continued to put pressure on industry margins and cash flows. Furthermore, the South African cost environment remains challenging, with continued inflation across the mining sector. Consequently Lonmin management will carefully balance the need to invest in growth ahead of the upturn whilst at the same time remaining focused on maintaining strong financial discipline.
The Rand PGM basket price throughout 2009 continued to squeeze industry profitability and cash flow, restricting capital investment. If this continues, further short term under investment will be the natural consequence. We therefore anticipate that supply will struggle to keep up with recovering demand from 2010 onwards and, as demand returns, there should be a recovery in PGM profit margins.
Looking at Platinum specifically over the next few years, we expect demand to improve gradually in 2010. This will be supported by a steady recovery in the automotive and industrial sectors with the market being in balance for the year. The behaviour of investors in the Exchange Traded Funds will continue to influence short term price movements. In early to mid 2011, we expect to see the start of a more significant upturn in demand, supported by increasing momentum in the automotive and industrial sectors followed by a more pronounced market rebound, with the market moving back into deficit.