Platinum to stay at lofty peaks

The South African power shortages that triggered supply fears and sent platinum prices rocketing made for a much anticipated price forecast on the metal at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto on March 2.

South Africa is the world’s largest supplier of platinum group elements (PGEs), and the power shortages led the government to restrict platinum mines to 90% of their usual power supply.

The news caused platinum prices to spike up through the US$2000 an oz. mark, leading some to wonder whether they were ripe for a fall back to earth.

But Victor Flores, a metals analyst out of HSBC’s New York offices, says there are several other factors that will contribute to platinum prices leveling off in the US$2000 per oz. range for the rest of the year.

Flores, in fact, spent little time discussing South Africa, and instead built his forecast on the shoulders of jewelry and auto industry demand as well as a probability model.

While higher platinum prices are, as anticipated, hitting jewelry demand and are also likely to cause an increase in recycling and thus a decrease in the metal’s supply deficit, Flores says that won’t be enough to wipe out the significant deficit in the platinum market this year.

In 2007 the deficit came in at roughly 450,000 oz. and he expects it to grow to 500,000 oz. for 2008.

In the short term, that bodes well for platinum prices, with inelastic demand from the auto industry providing support (an inelastic curve indicates that a price increase will not have a severe effect on quantity demanded.)

As for concerns that high platinum prices will lead to increased substitution of palladium for platinum, Flores says such a transition won’t be as complete as some think.

Both platinum and palladium are used in the manufacturing of catalytic converters, and with the global demand for cars strong, and stricter emission controls taking hold in more countries, both metals are anticipated to be in high demand.

Where a greater percentage of platinum is currently being used in catalytic converters, there is a move to increase the amount of palladium.

Such a move, however, requires new methodologies and new certifications that will take months to work out.

While the auto industry is having some success in making the transition, they aren’t doing it to the level that “palladium lovers say they are,” Flores says.

Palladium currently has a surplus of roughly 800,000 oz. and was selling for US$506 in London on Mar. 7.

Flores also made use of a probability model to anticipate prices. By way of a stochastic process that theorizes that today’s price depends on yesterday’s price and tomorrow’s price on today’s, the model predicted prices to settle in around at the US$2000 oz. range.