Funds Could Push Platinum
Price Higher to $1,250
Palladium Could Pass $400
But Downside Risk Remains
Johnson Matthey recently released its "Platinum 2006" Review. Here are highlights from that report:
Platinum market in deficit for 7th year: World demand for platinum reached 6.7 million oz in 2005, an annual rise of 160,000 oz. Purchases by the autocatalyst sector again grew strongly. Supplies of platinum grew by 140,000 oz to 6.63 million oz, with greater output from South Africa and Russia. Accordingly, the platinum market was undersupplied by 70,000 oz, the seventh successive year of deficit.
Diesels drive surge in autocat demand: Autocatalyst demand for platinum surged by 330,000 oz to a new high of 3.82 million oz. Most of the growth occurred in Europe and stemmed mainly from tighter emissions rules and the increased use of catalysed soot filters on light duty diesel vehicles. Purchases of platinum for jewelry manufacture fell by 200,000 oz to 1.96 million oz. The high price of platinum prompted a reduction in stocks across the trade and an increase in recycling of old jewelry.
Positive outlook for 2006: Platinum autocatalyst demand will strengthen in 2006, with further growth from the European diesel sector taking total purchases past the 4 million oz mark. Demand for platinum jewelry from affluent consumers in all major regions remains relatively robust, but further appreciation of the platinum price may bring about more liquidation of trade stocks. If supplies from South Africa increase as planned, Johnson Matthey expects the platinum market to remain in moderate deficit in 2006.
Funds could push platinum price to $1,250: The price of platinum traded between $860 and $880 for much of the first half of 2005. The second half was marked by increased volatility and a strong rally, as a substantial influx of fund money propelled the price to $1,012 in December. With no end in sight to the current commodities bull market, the price has potential to reach $1,250 during the next six months, with good end user demand likely to limit the downside to $1,025.
Palladium demand recovery continues: Palladium demand grew by 480,000 oz in 2005 to a five-year high of 7.04 million oz, primarily due to increased purchases by Chinese jewelry manufacturers. As in 2004, mine production was supplemented by substantial year-end sales of Russian metal from stocks and, at 8.39 million oz, total mine supplies of palladium exceeded demand by 1.35 million oz.
Jewelry manufacturing up sharply: Demand for palladium from the Chinese jewelry trade jumped by 71 per cent in 2005 to 1.2 million oz. The low cost of financing palladium, and the higher margins available compared with platinum, enabled manufacturers and retailers to establish and maintain large inventories of palladium jewelry. In contrast, purchases of palladium for autocatalysts increased by less than 1 per cent to 3.8 million oz in 2005, as average catalyst loadings continued to decline.
Mixed prospects for demand this year: After rising strongly for the last three years, demand for palladium could flatten out in 2006. Autocatalyst demand prospects are positive, as OEMs in the USA and Asia are increasingly replacing platinum with palladium in autocatalysts for gasoline engines. The outlook for jewelry demand is less certain. Although retail sales in China may well strengthen, the large inventories of palladium jewelry built up in 2005 could stifle any growth in purchases of metal by manufacturers. With South African mine output expanding, and Russia continuing to sell state stocks, another surplus in supply in 2006 is likely.
Palladium price could pass $400 but downside risk remains: The liquidity in the palladium market capped the price at or just above $200 for the first nine months of 2005, before fund buying in the fourth quarter pushed the price to $297. If speculative buying continues, Johnson Matthey forecasts that palladium could trade as high as $420 over the next six months, but that in the event of a major fund sell-off the price could drop to as low as $260.
From "Platinum 2006" here, in more detail, is Johnson Matthey's comments on Platinum's Supply, Demand and Price Outlook:
Platinum supplies from South Africa totaled 5.11 million oz in 2005, up by 100,000 oz compared with the previous year. Output of refined metal from Anglo Platinum was unchanged at just over 2.45 million oz, falling short of the company's intended output of 2.6 to 2.7 million oz. This was primarily due to an explosion at the group's Polokwane smelter in September that resulted in 120,000 oz of platinum accumulating in unprocessed stocks of concentrate.
Refined platinum production from Impala's main lease area on the western Bushveld rose by 6 per cent to almost 1.16 million oz last year thanks to increased mill throughput and a significant improvement in concentrator recoveries. The developing Marula Platinum mine on the eastern Bushveld, however, contributed only 31,000 oz of platinum in concentrate as the operation began making a transition from mechanized to conventional mining.
Lonmin produced 963,000 oz of platinum in 2005, a record for the group. Output from the company's western Bushveld mines increased as greater production from underground operations led to an improvement in head grades. Lonmin also gained a small volume of pgm output from the Messina mine on the eastern limb of the Bushveld complex, which it acquired in June 2005.
Notham's platinum production climbed to 225,000 oz, up 18 per cent on the previous year when the mine lost six weeks' output due to a fire. In addition, new technology at the company's UG2 concentrator contributed to an improvement in recoveries.
Aquaris Platinum's Kroondal and Marikana mines are both now operated under Pool & Share Agreements with Anglo Platinum. Platinum output attributable to Aquarius from the two operations in 2005 totaled just over 200,000 oz. The concentrator at the company's newest mine at Everest South was commissioned during December.
Platinum output from the Modikwa joint venture between Anglo Platinum and African Rainbow Minerals increased by 13 per cent to 129,000 oz, whilst the concentrator at the Crocodile River operations of Barplats was refurbished during the year.
Russian sales of platinum increased by 5 per cent to 890,000 oz in 2005. Norilsk Nickel was able to release details of its pgm output for the first time - the company produced 751,000 oz of platinum during the year, with output in the second half boosted by a reduction in pipeline stocks of pgm. Production from the alluvial mines in the Far East of Russia was relatively stable, whilst there was no evidence of sales by either the Ministry of Finance or the Central Bank.
Supplies of platinum from North America declined by almost 7 per cent to 360,000 oz in 2005. Sales of refined platinum by Stillwater Mining increased, despite a slight decline in average grades at its mining operations in Montana, but this was offset by lower output at Inco, Falconbridge and North American Palladium.
Production of platinum in Zimbabwe grew to 153,000 oz, up by 10,000 oz on the previous year as a result of increased output at both the Mimosa and Ngezi mines.
Demand for platinum in autocatalysts increased by 9 per cent in 2005 to 3.82 million oz. The diesel light vehicle sector in Europe continued to be the main driver of growth in platinum demand, with purchases by auto makers in the region climbing by 280,000 oz to reach 1.96 million oz.
Sales of diesels continued to rise, accounting for almost half of all new light vehicles registered in Western Europe, although the rate of growth slowed compared to the previous year. At the same time, the advent of Euro IV emissions limits plus the introduction of catalysed soot filters (catalysed diesel particulate filters) led to significant rise in average platinum loadings. Public concern about particulate emissions, notably in Germany, resulted in an increasing number of vehicle models being manufactured with a CSF as standard equipment, despite most being able to meet the requirements of Euro IV without one.
The use of platinum on autocatalysts in Japan also increased in 2005 but purchases fell by 3 per cent to 595,000 oz as a result of year-to-year changes in auto manufacturers' inventories of the metal. The greater use of platinum was partly a consequence of higher light vehicle output and a small rise in average loading levels, with an increasing proportion of light vehicles meeting the strict Japanese Ultra Low Emissions Vehicle standards. The use of platinum was also boosted by new emissions regulations that necessitate the fitment of after-treatment to most new heavy duty diesel vehicles.
In North America, autocatalyst demand for platinum increased slightly to 820,000 oz, despite the fact that light vehicle production in the region weakened. This was a consequence of a slow but steady rise in the retrofitting of after-treatment systems to heavy duty diesel vehicles, plus changes in market share between domestic and foreign vehicle brands.
Demand for platinum from the autocatalyst sector in China jumped from 75,000 oz in 2004 to 110,000 oz in 2005 - a result of higher light vehicle production (up 14 per cent) and the ongoing tightening of vehicle emissions limits. Autocatalyst demand for platinum in the Rest of the World region also increased, rising by 5 per cent to 335,000 oz, driven by stronger light vehicle production in much of Asia and South America. There was, however, a notable acceleration of switching from platinum-based catalysts to palladium after-treatment systems by certain vehicle manufacturers.
In 2005, jewellery demand for platinum slipped below 2 million oz for the first time since the mid-1990s, falling by 9 per cent to 1.96 million oz. Purchases of metal by Chinese manufacturers fell substantially for the third year in a row, and demand in Japan and North America also declined.
Chinese-jewellery demand for platinum dropped by 13 per cent to 875,000 oz in 2005, a greater decrease than we had previously forecast. The rapid rally in the platinum price from $930 to over $1,000 during November and early December resulted in a sharp fall in purchasing by the Chinese jewellery trade, which made worse what had already been a relatively weak year for demand.
The rise in the price throughout the second half of 2005 led to reductions in inventories of platinum jewelry and increased recycling, as wholesalers and retailers cut their holdings in the face of escalating financing costs. With retailers tending to place smaller and less frequent orders for platinum, manufacturers switched a greater proportion of their output to more profitable white gold and palladium jewellery.
At the retail end of the Chinese market, platinum jewellery sales trended down in the second half and third tier cities. This was partly due to higher prices, but was also a consequence of there being less platinum on display and consumers having a greater choice of white gold and palladium products. Furthermore, 2005 was widely considered to be an inauspicious year to get married and sales of bridal jewellery dropped throughout China compared with the previous year.
Purchases of platinum by Japanese jewellery manufacturers also fell significantly in 2005, dropping by 50,000 oz to 510,000 oz. The rise in the platinum price led to an increase in the volume of metal being recycled by manufacturers and wholesalers as they cut back on their product inventories. It also resulted in an upturn in the amount of old jewellery being sold back to the trade by consumers. At the same time, sales of wedding rings slipped as the marriage rate trended downwards, and white gold gained market share at lower price points.
Demand for platinum from the North American jewellery sector weakened by 5 per cent to 275,000 oz in 2005. Although platinum jewellery continued to sell well at the luxury end of the market, sales of both fashion and bridal products were hit by increased competition from white gold. As elsewhere, the high price of platinum also led to an increase in scrap returns and recycling of outdated platinum jewellery. European jewellery demand for platinum, however, remained stable at 195,000 oz, with the UK bridal market remaining relatively firm.
In contrast to the jewellery sector, purchases of platinum for industrial applications climbed to a new high of 1.675 million oz in 2005, up by 140,000 oz on the previous year.
Platinum purchases by the glass industry surged to 355,000 oz in 2005, an annual increase of 22 per cent. Demand was driven by substantial investment in Asia in new facilities for the production of glass for liquid crystal displays (LCD) and other flat panel displays.
Booming sales of computers and other consumer electronics also had a positive effect on consumption of platinum in the electrical sector, as these fed back to strong demand for hard disks. Combined with firm demand for platinum wire thermocouples and further development of fuel cells for portable applications, this resulted in electrical demand for platinum climbing by 20 per cent to 360,000 oz.
Consumption of platinum in the chemicals sector grew by 3 per cent to 335,000 oz in 2005. Demand for platinum-based catalysts for the production of silicones increased, thanks to the addition of new manufacturing capacity in Asia. However, the growth was partly offset by slightly lower consumption of the metal in other chemical catalyst applications and thrifting of platinum used in gauze for the nitric acid industry. Purchases of platinum by the petroleum refining industry increased moderately, rising to 155,000 oz on the back of the construction of new reforming and isomerisation capacity.
Total demand for platinum in other applications was stable in 2005 at 470,000 oz.
Supplies of platinum and demand for the metal are both forecast to grow more strongly in 2006 than last year. Consequently, we expect the market to remain in moderate deficit. There are, however, significant uncertainties on both sides.
On the supply side, growth in output in 2006 will again depend on whether South African pgm mining expansions proceed according to plan, with substantially higher production expected from several operation and the first metal due from the Two Rivers and Everest South projects. In addition, Anglo Platinum should benefit from the release of metal that was caught up in its process pipeline as a result of the explosion at its Polokwane smelter last September.
The political situation in Zimbabwe, however, is still not conductive to any significant expansion of pgm mining, with considerable disquiet over the government's stated intention to obtain a majority shareholding in existing operations.
On the demand side, the autocatalyst market remains robust: purchases of platinum are almost certain to exceed 4 million oz in 2006, quite possibly by a significant margin.
Further good growth will be seen in Europe from the light duty diesel sector. Average loadings per vehicle are forecast to continue to rise, driven by two factors: by October 2006 all new cars will have to meet Euro IV emissions limits (until now, only new models have had to meet Euro IV), and the proportion of diesel vehicles fitted with CSF will increase. At the same time, growth in diesel car sales should pick up this year after slowing in 2005. Although palladium will begin to make in-roads into the diesel after-treatment sector, this is unlikely to have notably impact on demand for platinum in 2006.
North American demand for platinum in autocatalysts is also forecast to increase this year, despite further substitution of platinum by palladium in gasoline catalyst systems. The spur to increased demand for platinum will come instead from the heavy duty diesel sector, as a majority of new models manufactured this year will need to be fitted with either an oxidation catalyst or a CSF (or both) in order to meet new emissions regulations that come into effect in 2007.
Autocatalyst demand for platinum in China and the Rest of the World region is also projected to continue growing on the back of higher vehicle production and tightening emission limits. In South Korea, greater output of diesel cars (with higher average loading levels) for export to Europe will contribute to growth in autocatalyst demand for platinum.
The Japanese autocatalyst sector will be an exception in 2006, as platinum demand is expected to soften as a result of greater use of palladium-based catalysts on new light vehicle models. Demand will still be relatively strong, however, due to the fitment of after-treatment systems as original equipment to new heavy duty diesel vehicles.
In contrast to the autocatalyst sector, the outlook for platinum demand in jewellery is mixed. On the positive side, sales of platinum jewellery to affluent consumers in all major regions have remained relatively robust in the face of much higher metal prices. In addition, this year is expected to see a substantial increase in the number of weddings conducted in China, as 2006 is considered to be a much more favourable year to get married than 2005.
In addition, Chinese retailers held back from replenishing stock as much as possible in late 2005 and early 2006 as the platinum price was rising steeply. The result was that, following the New Year holiday in early February 2006, inventory levels were generally very low. Consequently, a substantial upturn in demand for platinum was seen from Chinese jewellery manufacturers in mid-February and March.
However, should the platinum price continue to strengthen during the year we would expect to see additional stock reductions and recycling throughout the global jewellery trade. Platinum could also lose further sales to white gold and to palladium.
Demand for platinum in industrial applications is projected to expand again this year. Another increase in consumption of the metal in hard disks is expected to outweigh a slight softening in demand from the glass industry.
The fundamentals of the platinum market, therefore, remain positive and any shortfall in the projected increase in supplies this year will lead to a tightening in availability of metal and higher lease rates. However, speculative activity across the metals markets is likely to exert a greater influence on the price of platinum in the short term than the supply-demand balance. With no end in sight to the current commodities bull market, and with the dollar widely expected to weaken this year, the price has further upside potential. We therefore forecast platinum could reach $1,250 within the next six months. Conversely, in the event of significant fund long liquidation, good end user demand is likely to limit the downside to $1,025.
Editor's Note: Johnson Matthey is the world's leading authority on the production, supply and use of platinum and the other metals of the platinum group. The company's main activities include the manufacture of autocatalysts, platinum process catalysts and specialty chemicals and the refining, fabrication and marketing of platinum group metals.
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