Wednesday 28th September 2016

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Precious, practical and fickle

Platinum’s supply shortage won’t boost its near-term price, a report cautions

by Greg Klein

Forecasts that platinum prices would break free of gold have so far proved premature. True, the metal now attracts strong ETF interest in addition to industrial uses, not to mention jewelry and bullion. Demand is set to hit record levels this year, pushing supply further into deficit. But a comprehensive study of the metal’s 2013 performance finds it “increasingly unresponsive to supply-side concerns.”

Indeed, “after rising above $1,700 in February, platinum was dragged below $1,400 following a sharp fall in the gold price.” That comes from the Platinum 2013 Interim Review released November 12 by Johnson Matthey, self-described as “the world’s leading authority on platinum group metals.” The 40-page report compiled by an 11-person research team tracks the year’s PGM performance in supply, demand and price by jurisdiction and use. While the study finds considerable push and pull from other forces, the vagaries that trouble gold seem to afflict platinum too.

Yet this year’s supply deficit is forecast at 605,000 ounces, compared to 340,000 ounces in 2012, thanks to ETFs and industry. The latter includes automotive catalytic converters as well as chemical, electrical, glass, petroleum and medical/biomedical uses.

Platinum’s supply shortage won’t boost its near-term price, a report cautions

The researchers say an 11.5% increase in industrial demand will come largely from chemical uses while catalyst demand will drop. As for ETFs, “unprecedented offtake” in South Africa, along with ETFs from other regions as well as bars and coins, “will lift investment demand to a record 765,000 ounces.”

Most of that came from “pent-up demand” in SA where the new Absa Capital ETF rose to 660,000 ounces between its April launch and the end of September, Johnson Matthey points out. The rand-denominated, Johannesburg-traded product attracted institutions that face limits on foreign investments, but also anyone who could afford the 1/100th-ounce minimum purchase.

Along with supply concerns, that ETF partly offset the precious metals plunge that started in April. But by the end of September, the report indicates, platinum’s performance often mimicked gold’s rise and fall in response to speculations about the Fed, quantitative easing and the U.S. debt ceiling. The study tracks platinum’s progress to a September 27 low of $1,411. Still, that’s an improvement over $1,323 in June following the spring precious metals crash that coincided with a weakening auto sector in Europe. Platinum began November 13 at $1,436.

The anticipated breakout from gold hasn’t happened. Even so the year’s platinum mine supply forecast comes to 5.74 million ounces (up 1.6% from 2012), plus 2.07 million ounces from recycling, versus 8.42 million ounces of demand (up 4.9%). Commodity price explanations don’t come easily, especially with precious metals. And platinum is considered both precious and industrial, potentially pulled in different directions by opposite forces. Johnson Matthey attributes about 9% of 2013 demand to investment and 32% to jewelry.

Looking ahead, the report sees a third consecutive deficit next year but “this may not be sufficient to support higher platinum prices.” The predicament of South Africa, the world’s leading producer but with dwindling reserves and uncertain labour conditions, might have been expected to push platinum prices further. “But investor fatigue appears to have set in and sporadic strikes in 2013 have had increasingly little influence on the price.”

[A not-yet launched Johannesburg-traded ETF comprises] the biggest uncertainty facing the palladium market next year.—Johnson Matthey’s
Platinum 2013 Interim Review

The report sees palladium ($741 an ounce on November 13) showing a smaller but still significant 2013 deficit of 740,000 ounces. The metal’s mined for catalysts, largely for gas engines, as opposed to diesel motor catalysts that use platinum. Other key consumers are the chemical, dental and electrical industries.

The mine supply forecast shows 6.43 million ounces, down about 1.5% from last year. Recycling brings in another 2.46 million. Demand comes to 9.63 million, down 3.4%. About 7.8% of demand comes from investment and 4% from jewelry.

Both industrial and investor demand have dropped despite “significant inflows into palladium ETFs in the first two months.” But the authors note that Absa Capital has received SA regulatory approval for a Johannesburg-traded palladium ETF, a “wild card” that’s “the biggest uncertainty facing the palladium market next year.” The ETF’s launch date hasn’t been announced.

Rhodium, also used for catalysts and in the chemical, electrical and glass industries, began November 13 at $980. That’s barely above July’s nine-year low of $975, despite demand reaching a six-year high. The report attributes the contradiction to a “large hangover of surplus metal that accumulated between 2008 and 2011.” Today’s small deficits are “entirely due to the movement of market stocks into physically-backed investment products” from a Deutsche Bank rhodium ETF as well as rhodium bars sold in North America and Europe.

Prices for ruthenium and iridium, both used for electrical, chemical and (of course) electro-chemical uses, dropped sharply this year. The report attributes “a long-term imbalance between primary production and consumer offtake.”

Examining supply by jurisdiction, South Africa shows little change in platinum production, a result of depleting deposits and labour unrest. Only Zimbabwe, a country fraught with jurisdictional risk, is likely to increase its platinum output in 2014.

Russia’s platinum production will see a slight decline. Palladium too, because of reduced sales from government stockpiles, “now an insignificant part of the overall palladium supply picture.”

Nor will Canadian production see much change. Lower output from North American Palladium’s TSX:PDL Lac des Iles mine in northwestern Ontario will be offset by increased palladium byproduct from nickel operations at Glencore Xstrata’s Raglan mine in northern Quebec and Vale’s Sudbury operations, the report states.


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