Platinum price puzzles
If anything demonstrates the illogicality of the precious metals markets, it appears to be platinum. But is this really the case? Currently the metal is languishing at around a five-year low, yet most analysts put global platinum supply as being in a substantial deficit situation ever since last year’s South African platinum mine strikes, which took a substantial hunk of the metal out of the markets. Platinum is also selling at a lower price than gold – around $40 an ounce lower at the moment – which is a relatively rare, but not unknown, occurrence.Indeed the world’s most respected platinum analysts at Johnson Matthey suggested that the platinum deficit last year was upwards of 1.1 million ounces – and in a total global market of around 8.5 million ounces, that is a big percentage deficit of getting on for 13%. Not only was platinum in deficit in 2014, but it had also been in deficit for the previous two years too, although not as large.
Indeed most analysts have been falling over each other to predict better things for platinum prices this year. In the recent LBMA metals forecasting competition both platinum and its sister metal palladium were seen as the precious metals price winners over the year, and while it is early days yet, recent market prices suggest that this may not actually happen.
In the executive summary to the LBMA precious metals price competition, which took into account price forecasts from 26 professional analysts from around the world, the analysts were more bullish about the prospects of PGMs in 2015 than for gold or silver. Platinum was expected to be the best performer with prices forecast to average $1,294 in 2015, 5.6% higher than its price in the first half of January (and around 12% higher than where the price is sitting at the time of writing, although still 6.6% below its average price in 2014).
The analysts cited positive influences on the price to include a supply deficit (despite expected improvement in South African production) and rising costs which might also push prices higher along with strong demand from China and industrial investors. On the negative side was the considered weak outlook for gold prices and macroeconomic factors which were seen as likely to act as a restraint on prices.
The relationship to the gold price is the true illogicality in the platinum market. Platinum is very much an industrial metal. Demand depends heavily on its use as an autocatalyst. Mostly in diesel engine applications with its position as a gasoline-engine catalyst largely usurped by the cheaper palladium alternative. Autocatalysts account for nearly 40% of the metal’s use with other industrial applications accounting for around a further 25%. The balance goes into the jewellery sector with Asian demand particularly strong in this area. Both autocatalysts and jewellery see a fair amount of recycling, but in most other industrial uses the vast majority is consumed.
Thus, on the face of things, a pick-up in global industrial demand – the automobile market is considered to be particularly strong at the moment with increasing platinum usage due to ever tightening pollution control legislation – and a general return to economic growth in the U.S. in particular, should be contributing to increasing demand in a market already seen as in deficit.
South African mine production (which accounts for about 70% of global new mined output) should also be seen as a contributor to the supply/demand equation. It is widely reckoned that some of the older, deeper, platinum mines in the Anglo American Platinum stable in particular, have been running at a loss at recent platinum prices – and even more so now. Anglo Platinum is keen to divest these and known suitors include Sibanye Gold and Northam Platinum (which is also acquiring the Everest platinum mine from Aquarius Platinum).
Valuation is perhaps the main stumbling block here – how do you value a lossmaking operation but with millions of dollars’ worth of existing operating infrastructure? If divestiture talks fall apart Anglo Platinum will be looking to close some operations, but will come up against government and unions as these deep mines have significant workforces. And whether new ownership, if it does come about, will actually be able to glean a profit from the operations and keep them going is another point in question.
So how has the falling price come about given the global supply deficit? One of the answers is the overhang in speculative holdings of platinum in some big ETFs. At the time of the South African platinum mine strikes, platinum held in ETFs surged to perhaps 2.7 million ounces or more. Given that the price has not moved upwards as a result of the supply deficit – and indeed has fallen – liquidations out of the ETFs have reportedly increased so as to counter some of the supply deficit. But even more important perhaps has been the buildup in platinum stockpiles against possible future shortages.
Late last year the World Platinum Investment Council (WPIC) estimated above ground global platinum stockpiles at 2.56 million ounces at end 2014 – enough to more than cover any anticipated platinum supply deficit for perhaps two to three years. The WPIC defined this stockpiled material as: “the year-end estimate of the cumulative platinum holdings not associated with: exchange traded funds, metal held by exchanges or working inventories of mining producers, refiners, fabricators or end-users.”
It was these huge platinum stockpiles which contributed to platinum prices not rising significantly during the South African platinum mine strikes. The WPIC had previously estimated size amount of stockpiled platinum at the end of 2013 was a huge 4.14 million ounces so it is apparent that this was run down substantially to counter the loss of the South African production.
So in platinum, all is not what it seems on the surface. We may be in a period of substantial supply deficit, but as long as there remains considerable stockpiles and metal held in the ETFs, assuming the estimates are largely correct, there appears to be no real shortage in the global industrial marketplace. So predictions of good price increases this year because of the perceived supply/demand balance may just not come about.
However, if gold were to rise significantly, undoubtedly platinum would follow the gold price upwards. The platinum price seems unlikely to increase significantly on what have been seen as strong basic supply/demand fundamentals as long as consumers can continue to draw on the massive amount of stockpiled material to mitigate any shortfall in demand. If the basic supply deficit continues and the stockpiles are run down significantly, then maybe platinum will start to move upwards on its own, but it could still be some time before this might actually happen.
Platinum price puzzles - Mineweb
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