Platinum to rack up eighth year of surplus

The following commentary sets out some of the main highlights from the London presentation, delivered by Philip Klapwijk, Global Head of Metals Analytics at Thomson Reuters GFMS:

Looking first at platinum, the consultancy estimates that the metal’s gross surplus eased by some 12% last year to 735,000 ounces (22.9 tonnes), although this remained substantial by historical standards. The narrowing of platinum’s gross surplus owed much to a near 7% rise in fabrication demand to a three-year high. GFMS revealed that the gains were quite broadly based, led by a marked recovery in Chinese jewellery offtake, as prices declined sharply in the latter part of 2011. Similarly, retail investment also recorded sizeable gains towards the end of the year, led by resurgent sales in Japan as platinum traded below gold.

Finally, the consultancy noted the 4% lift for platinum autocatalyst demand, although this was restrained by the effects of continuing substitution (in favour of palladium), lacklustre vehicle production in Europe and last year’s natural disasters in Japan. As a result, platinum autocatalyst demand remained considerably short of pre-recession levels.

Overall, the increase in global fabrication demand outweighed a near 5% rise in global platinum supply last year, enabling the above 12% year-on-year decline in platinum’s gross surplus. Last year’s supply growth was driven by a recovery in Canadian mine production, as Vale’s operations returned to normal and mining ramped up at Lac des Iles. Meanwhile, platinum supply from autocatalyst recycling grew by close to 9% last year; a performance which might have been stronger were it not for a fourth quarter decline in the face of weaker PGM prices.

The final area of supply featured in Platinum & Palladium Survey 2012, namely jewellery scrap, rose by 11%, due to a jump in Japanese recycling which benefited from further development of the country’s collection infrastructure. Although somewhat lower in 2011, platinum’s gross surplus last year marked the seventh consecutive year in which such conditions have prevailed. As Klapwijk noted, “the fact that platinum prices remained elevated over much of last year – enabling a new all-time high in annual average terms of $1,722 – was testament to broadly favourable investor sentiment, evidenced by a 12% rise in World Investment demand.”

Looking ahead, an expected rise in gold investment during the second half of 2012 should spill over into the platinum market, with prices also likely to find solid support from production cost pressures in the South African mining industry.

However, the ongoing Eurozone crisis presents a major downside risk, given the concentration of platinum autocatalyst demand in Europe. Thomson Reuters GFMS therefore expect platinum to trade in a range of $1,475 to $1,775 over the remainder of this year.

Turning to palladium, the consultancy reveals that in 2011 its gross deficit almost halved to 313,000 ounces (9.7 tonnes). This owed much to a relatively subdued 2% rise in global fabrication, which nonetheless reached an 11-year high. This featured a solid 5% lift for palladium autocatalyst demand (also an 11-year peak) driven by firmer demand in gasoline applications and substitution-related gains at the expense of platinum.

However, as the Platinum & Palladium Survey reveals, these gains were partially offset by weaker offtake in most other areas of palladium fabrication demand, with the heaviest losses having emerged in jewellery (principally in China), which declined to an eight-year low. As a result, this relatively modest increase in global palladium fabrication was comfortably outstripped by a 5% rise in supply, which posted a new record high. In addition to a lift of more than 3% in mine production, this was a function of robust gains in autocatalyst recycling which continued to benefit from the historical escalation in palladium autocatalyst demand during the late 1990s/early 2000s.

Finally, despite a smaller gross deficit, substantial liquidations from ETF holdings and a reduction in investors’ long positions on futures markets, palladium prices still posted a record high annual average in 2011 of $734.

As Klapwijk commented in London, “this followed a dramatic rise in prices during late 2010 and early 2011. And even though last year saw palladium prices fall by 20% on an intra-year basis, the decline was limited to the last four months, and driven very much by profit taking”.

Looking ahead to the rest of this year, Klapwijk added; “palladium prices are also likely to benefit from the favourable investor climate towards precious metals, while the downside may be limited as palladium’s demand base in autocatalyst is less exposed to Europe and is quite broadly based geographically”.

Overall, therefore, palladium is forecast to trade in a range of $575 to $775 through to end-2012.