GFMS: Will platinum’s dark days last?

The following is an edited release by Thomson Reuters on the occasion of the publication in early June of the GFMS Platinum Group Metals Survey 2018, which looks at developments in the global platinum group metal (PGM) markets over the past year, and sets the scene for the rest of 2018.

Despite an uptick in autocatalyst recycling and resilient mine production, platinum supply was tempered by a fall in jewellery scrap, leaving total supply almost unchanged in 2017. On the demand side, offtake was slightly weaker, as stronger industrial demand was more than offset by falls in jewellery and retail investment, leaving the overall market in a physical deficit for the fourth straight year at 0.05 million oz. (1.6 tonnes).

Platinum mine production inched 1% lower in 2017 to stand at 5.92 million oz. (184.2 tonnes), driven by lower production from South Africa, Zimbabwe and Canada. Production disruptions in the form of maintenance work, safety stoppages and mine suspensions were predominantly behind the drop in South Africa.

Elsewhere, a normalization in ore stockpiles led to losses, together with a metal drop in mined ore. The closure of high-cost shafts and higher metal prices pushed costs down 2% on a total cash cost + capex basis, while increasing the peer group’s earnings before interest, taxes, depreciation and amortization 14% to US$1,702 million (excluding Russia), year-on-year. The drop in costs placed 32% of production underwater, down from 35% in 2016.

Platinum uptake in the production of autocatalyst applications last year rose a healthy 7.1% to 3.48 million oz. (108.2 tonnes), despite the negative sentiment from the vital diesel market in developed economies. This was the fourth consecutive rise and saw offtake reach the highest level in a decade.

While still the largest consuming region, Europe lowered its share of platinum demand, which was a reflection of lower average platinum loadings, with platinum demand falling 2% to 1.4 million ounces (45.1 tonnes). China was again the standout, rising 16% in 2017.

Jewellery demand retreated 5% year-on-year to an estimated 2.20 million oz. (68.6 tonnes), in its  fourth consecutive annual decline. The biggest falls were seen in China and Europe, with fabrication in these key markets falling 8% and 6%.

In China, competition from carat gold jewellery eroded market share, while another drop in demand from the watch segment in Switzerland and a price-related decline in the U.K. accounted for most European losses.

Platinum consumed in industrial applications (excluding autocatalyst) rose a combined 7% to a record high. The largest gains were seen in the petroleum and glass sectors, which rebounded 27% and 22%, with the former boosted by higher Chinese capacity.

Retail investment fell 45% in 2017 to an estimated 0.30 million ounces (9.4 tonnes). The material fall, the second in succession, has now seen investment demand decline 279,000 oz. (8.7 tonnes), from the peak in 2015. Japanese demand slumped 55% last year, despite platinum remaining below ¥4,000 per gram level.

Palladium

Palladium’s physical deficit edged lower last year to 1.20 million oz. (37.3 tonnes), retreating slightly from the record level seen in 2016 of 1.33 million ounces (41.2 tonnes). A 5% rise in total supply was partly offset by more modest gains on the demand side. Adjusting for stock movements (from exchange-traded fund redemptions and industry stocks), the net balance slipped to a deficit of 0.91 million oz. (28.2 tonnes) — the deepest deficit since 2014.

Mine production of palladium rose 3% to total 6.74 million oz. (209.7 tonnes) last year, as output rose in Russia, South Africa and the U.S., but was capped by the losses in Canada. An increase in palladium content in mined ore lowered the balance despite bottleneck issues at South Africa’s platinum belt. At the asset level, the largest increase was registered at Norilsk’s Russian operation, led by the processing of concentrate bought from Rostec and work-in-progress material in transit from the Polar to Kola division.

Palladium demand in autocatalyst applications rose 4% to 7.9 million oz. (245.1 tonnes) last year, which was slightly faster than new vehicle demand and at a record high. This reflected rising loadings — in particular, in parts of our Other Regions category and China, but also in North America — driven by continued tightening emissions legislation. China introduced China 5 for LDV in 2016 and China V for HDV last year, with both impacting PGM demand and contributing to a 5% year-on-year basis. North America in turn phased in its Tier 3 regulation, which had a positive effect on loadings, albeit not to the same degree as in China. European demand rose only at the margin in 2017, boosted in the main by real-world driving emission testing, which have supported higher PGM loadings and a rise in gasoline vehicle market share.

We expect the platinum price will start a recovery this year, albeit a gradual one. This is predicated on a small deficit this year, of nearly 0.3 million oz. (22.5 tonnes), fuelled by a contraction in supply, chiefly from the South African mining sector, coupled with rising demand. In the case of mine output, the decline owes to a sustained reduction in capital expenses in recent years leading to a denuded pipeline of new projects, and closures from marginal operations.

Meanwhile, the palladium price is set to exceed platinum on an annual average basis in 2018 — a historical first.

We also expect renewed bouts of tightness in supply to generate higher lease rates. Our long-standing bullishness for this metal remains underscored by the growth in demand from the automotive sector, which is set to continue, despite record prices, as substitution is not underway at present (although various manufacturers are, as always, exploring options to mitigate any risk deriving from the price differential between the two metals).

More support is set to arrive from declines in mine output from the two dominant producing countries: Russia and South Africa.

That said, total supply will barely change due to increased autocatalyst scrap and higher output from North American mines. As a result we expect palladium to average over US$1,000 per oz. on an annual average basis for the first time ever this year.