Platinum could go up or go nowhere

The platinum market is shakier than it has been for many years, says a report by Johnson Matthey, which produces a third of all catalytic converters used to control vehicle pollution.

 

High prices in early 2008, peaking at US$2,276 per oz. in March, caused end users to watch consumption, but the fall in prices in the second half of the year, to a five-year low of US$763 per oz. in October, will likely cause problems for producers looking to expand. At press time, platinum was selling for US$867 per oz.

 

The report predicts a 240,000-oz. deficit in platinum supply for this year, which is a 4.2% fall to 6.28 million oz. World demand is thought to be about 6.52 million oz.

 

Production from South Africa will be about 250,000 oz. lower at 4.78 million oz., while production from Russia will fall to 855,000 oz. but output in North American and Zimbabwe are expected to increase slightly.

Power supply problems in South Africa, the dominant producer, are to blame, as well as smelter outages and a lack of skilled staff. Anglo Platinum (AMS-J) closed down its Polowane smelter in early November. The company says it could lose up to 200,000 oz. of platinum production as a result from its forecast of 2.4 million oz.

 

Into 2009, power issues in South Africa will be more stable but that doesn’t mean platinum production will be all that it can be; instead the stability will allow miners to work around more-controlled power outages. Johnson and Matthey expects output to be steady with a few new producers, Platinum Australia (PLA-A) and Ridge Mining (RDG-L), added to the mix.

 

While much doubt remains about when the world economy will recover, a decline in car sales is expected over the next year. Fortis/VM group says car sales in Europe fell 15% between October 2007 and 2008.

 

But Johnson and Matthey says global auto catalyst demand for platinum will still show growth in 2008 – up an estimated 85,000 oz. to 4.23 million oz., though North American demand will fall by 305,000 oz. due to lower vehicle production. New rules for light emissions in Europe, that take affect in late 2009, will force the use of diesel particulate filters, which require platinum, in almost all diesel cars sold in Europe. This will be good for platinum demand despite the poor outlook for vehicle production. Vehicle output in China and other developing countries is also offsetting the slowing North American market.

 

The prices spike in the earlier part of 2008 affected jewelry demand by sparking increased recycling when and lower purchases of new material by manufacturers. It’s expected that jewelry makers will buy 1.12 million oz. of platinum in 2008, a decrease of 340,000 oz. overall this year. The recent decline in price means the industry is able to refill stock with new material, fueling some recovery in demand.

 

Investment in physical platinum is projected to fall by 25,000 oz. to 145,000 oz. in 2008. Earlier in the year, large amounts of metal were bought through exchange traded funds as the price rose, having an impact on liquidity and price but all that changed by the third quarter as the price fell.

 

Fortis/VM group says platinum was the metal of choice for the ETF selloff in the second half of this year. UK ETF holdings fell by more than 200,000 oz. to just 136,409 oz. at the end.

 

Johnson and Matthey expect platinum to trade somewhere between US$700 and US$1,400 per oz. over the next six months. The company says the relative outlook is somewhat positive with a broad warning that it will all depend on how the economic crisis plays out into the new year.