Despite economic crisis, platinum in short supply

Platinum prices have tumbled from last year’s high of US$2,301 per oz. to about US$1,160 per oz. today, but Bank of America Merrill Lynch forecasts that fundamentals for the metal are likely to improve in the medium term and predicts prices will rise above US$1,500 per oz. in the next few years.

The main reason is the supply deficit, the bank argues in a July 24 research note to clients. Before the economic crisis hit, platinum supply had been constrained for a decade, so even though demand has fallen dramatically, the supply overhang remains small, the analysts argue.

“Despite the collapse in demand from investors and industrial users we only expect a small surplus in the platinum market of around 190,000 ounces for 2009,” the bank analysts wrote. “In our judgment this figure would not be sufficient to replenish industry stocks, which were drawn down over a decade of persistent deficits. In part, the relatively small supply overhang is directly linked to weak production levels, especially in South African mines.”

Indeed South Africa is responsible for about 76% of the world’s platinum supply and production there has been dropping off since 2007 due to power supply problems and safety issues. The bank analysts argue that those problems are likely to persist going forward, challenging supply and tightening the market. They also point out that car sales will eventually recover — driving up demand for platinum from autocatalyst producers.

With increasing power costs in South Africa coupled with several of the major platinum producers cutting their capital expenditure since the crisis began — platinum prices should be supported in the years ahead.