Metals commentary: PGMs could see supply shortage this year: CPM

The following is an excerpt from a summary of the CPM Group’s Platinum Group Metals Yearbook 2012 report.

The annual average prices of platinum and palladium rose to multi-year highs in 2011. Platinum prices averaged US$1,722.39 per oz. and palladium prices averaged US$733.85 per oz. last year, both of which reached record highs.

Quarterly average platinum group metals prices rose in the first quarter of 2011 and fell in the subsequent three quarters, based on the nearby active Nymex settlement price for platinum and palladium, and the BASF price for rhodium. Although quarterly average prices came off after the first quarter of the year, they remained elevated until the last quarter, in which platinum, palladium and rhodium prices averaged 13.5%, 16.3% and 16.1% lower than the previous quarter. This was the steepest decline since 2008 and was driven by a rapid deterioration of economic growth expectations, and a reduction in investment demand for these metals.

Platinum and palladium supply and demand growth slowed in 2011 relative to 2010, a recovery year after a deep recession. Demand growth slowed due to weaker economic conditions. Supply growth slowed due to production disruptions at South African PGM mines, and marginal growth in Russian output.

Investment demand was strong in the first few quarters of the year and dropped in the last quarter due to worsening investor sentiment toward PGM price expectations.

Platinum prices rose to an intraday peak of US$1,918.50 per oz. on Aug. 23, up 8.2% from the end of 2011, and dropped 29.8% from this peak to an intraday low of US$1,347 per oz. on Dec. 29.

Newly refined platinum supply rose 3.5% in 2011, driven mostly by an increase in mine supply. Much of the growth in mine supply came from ramped up production in Canada, whose output more than doubled last year. Secondary supply rose 2.5%, backed by continued growth in vehicle scrappage worldwide.

Platinum fabrication demand increased 2.2% to total 7.4 million oz. in 2011. This was lower than the 3.2% growth seen in 2011. Slower growth was driven by slower economic expansion and the disruption to industrial production in Japan due to natural disasters. Europe, the largest user of platinum in auto catalysts, increased auto catalyst platinum requirements by 2% in 2011. The region’s recession in the fourth quarter of the year and into the first half of 2012 is expected to result in a 2% decline in platinum auto demand in 2012. Jewellery demand held up well despite higher prices for much of the year. Jewellery demand rose to 1.9 million oz., 1.2% higher than 2010. Jewellery is the second-largest component of platinum fabrication demand after auto catalysts.

Platinum investment demand was strong until the fourth quarter in 2011. Platinum exchange-traded product holdings fell from a peak of 1.5 million oz. in the middle of September to 1.3 million oz. at the end of the year, which is nearly a 12% drop. Investment demand for platinum was the most resilient of the platinum group metals.

Palladium prices peaked on an intraday basis at US$861.45 per oz. on Feb. 22, up 7.2% from the end of 2011, and dropped to a yearly intraday low of US$535 per oz. on Oct. 5, a 37.9% drop from February’s intraday peak. Palladium supply increased at the fastest pace among the platinum group metals, rising 4.8% to total 8.6 million oz. last year. This strong growth in supply, coupled with a massive offloading of metal from palladium exchange-traded product holdings, were the primary drivers of lower prices for much of the year, according to findings in the Platinum Group Metals Yearbook 2012. Mine supply rose 5%, which was the strongest increase since 2006. Mine supply was still lower, at 6.9 million oz., than the peak of 7.4 million oz. achieved in 2006. Canadian mine supply more than doubled in 2011 due to Vale’s ramped-up Sudbury operations and North American Palladium’s Lac des Îles mine.

Palladium fabrication demand also rose at the strongest pace of the platinum group metals, reaching 8 million oz. last year for a 3.5% increase over 2010. Palladium fabrication demand has benefited from the metal’s increased use in diesel auto catalysts over the past few years; the sheer increase in auto sales, particularly in auto markets dominated by gasoline powered engines, since 2010; and higher palladium demand from the electronics industry. Of the components of palladium fabrication demand, demand for the metal from the auto sector rose at the strongest pace, up 5.6% in 2011. Auto demand also is the largest source of fabrication demand, accounting for 61.1% of total demand in 2011. This is up from 10.7% in 1990 and 42.6% in 2000. Regional auto markets such as China and the U.S., the two largest gasoline vehicle markets in the world, witnessed healthy growth in auto sales last year, which was positive for demand for the metal. The yearbook examines key regional markets in detail, providing palladium demand statistics by component and major regions for all of the platinum group metals. The palladium market is has been in surplus since 2001. The annual surplus has been declining since 2005 and could fall into deficit in 2012 or 2013.

Rhodium prices trended lower in 2011, falling from a monthly average of US$2,343.74 per oz. at the beginning of the year to US$1,385 per oz. at the end of the year. Ample supplies of the metal coupled with slow growth in fabrication demand weighed on prices last year. Total newly refined rhodium supply was 991,620 oz. in 2011, up 2.6% from the previous year. Higher mine supply in Canada, which more than doubled, helped offset a decline in rhodium mine production in South Africa. South African mine supply fell marginally in 2011, to 670,166 oz., or 0.1% lower than 2010 levels. Declines in rhodium output at two of the top four PGM mines in the country weighed on supply.  

This year’s yearbook discusses two trends in the rhodium market that could affect prices more positively in the future. First, introducing an exchange-traded product physically backed by rhodium, launched by Deutsche Bank on May 19, 2011, will provide the market with a transparent indication of investment demand trends for rhodium. Second, a trend has emerged in South African rhodium mine production growth that may suggest slower growth in the future relative to the past couple of decades. Rhodium mine supply in the country has been rising at a more rapid rate than platinum and palladium, mostly due to significant improvements in processing and refining techniques and recovery rates. This trend appears to be fully in place, with rhodium mine supply growth moving more in-line with the other two metals.

Fabrication demand for rhodium rose at the slowest pace of the platinum group metals, increasing 1.3% last year. Auto demand, which accounted for 82.6% of total fabrication demand in 2011, rose a modest 0.7% last year. This was the smallest year-on-year increase since 1995 (demand declined in 2001, 2008 and 2009). Demand from the auto sector has been adversely affected by aggressive pursuits of thrifting the metal, following the surge in rhodium prices to around US$10,000 per oz. in 2008. Despite higher auto sales and ongoing tightening of emission standards, demand for the metal may be weighed down by thrifting on the part of fabricators.

The platinum market is expected to be in a substantial deficit this year and palladium could fall into a deficit, due to lower South African and Russian output. Rhodium’s surplus is expected to decline in 2012, similar to platinum and palladium, mostly due to a decline in mine production in South Africa, the largest producer of PGMs. CPM Group’s yearbook contains supply, fabrication demand and investment demand statistics since 1976, and projections for 2012. The yearbook provides in-depth analysis of the various components of these markets, how they influenced prices last year, and how they coul
d define prices in 2012. The yearbook also briefly discusses the minor PGM markets, which include iridium, ruthenium and osmium.

— CPM Group is an independent commodities research, consulting and corporate advisory company headquartered in New York which has been producing annual yearbooks on gold, silver and platinum group metals since 1971.

This year’s reviews have been priced at US$150 plus shipping and handling. Individual investors, institutions, corporations and governments can place orders online at http://store.cpmgroup.com.