HSBC’s bullish bias on platinum

Strikes at South Africa’s three largest platinum producers, robust global demand from the auto sector, and strong jewelry demand in China, will push the average price of platinum this year to US$1,595 per oz., James Steel and Howard Wen of HSBC Global Research write in a new research report. The platinum price hit a year-to-date high of US$1,486 per oz. in early March.

The New York-based analysts believe that the platinum deficit in 2014 will reach 705,000 oz., up from their previous forecast deficit of about 402,000 oz.,  and contend that mine supply this year will come in at 5.66 million oz. platinum, a decline from 5.74 million oz. in 2013. 

The strikes in South Africa at the world’s three largest platinum producers — Anglo American Platinum (Amplats), Impala Platinum (Implats) and Lonmin — have idled just over 60% of the country’s platinum production since January, or about 45% of global output. (The report notes that South Africa sits on about 85% of the world’s PGMs.) They forecast that platinum supply in South Africa this year will fall to 4.04 million oz., an 81,000-oz. reduction from 2013.

Even without the strikes, they maintain, the platinum market “would have operated under a production/consumption deficit this year.”

“So far producer stockpiles have been sufficient to cover the loss in output due to industrial action,” they write. “However, we believe that ongoing structural persistent deficits going forward will eventually drive prices higher.”

In Russia, meanwhile, the world’s second-largest platinum producer (the country produces about 13% of the world’s total supply of the metal) is forecast to produce 735,000 oz. this year, according to the HSBC analysts.

While mine supply falls, demand is set to rise.

Demand for platinum in the auto sector is expected to climb from the analysts’ previous forecast of 3.48 million oz. this year to about 3.49 million oz. Auto off-take of platinum last year was 3.24 million oz., based on figures the bank cites from Johnson Matthey. Aggregate global production is forecast to reach 64.86 million units in 2014 and 88.57 million units in 2015. (The auto sector roughly accounts for more than half of the world’s consumption of the metal.)

In China, the world’s largest automotive market since 2009, HSBC sees production growing by 10.7% in 2014 and by 7.2% in 2015. “In the five years to 2013, per capita income in China grew at an average annual rate of 10.2%, leading to a notable increase in China’s auto buying middle class,” the analysts write. “While China’s savings rate remains high relative to OECD members, consumption has increased, especially for durable goods, such as autos … China’s automobile market in 2001 was tiny, with total annual sales well below 1 million units. As per capita incomes increased, reaching US$6,000 in 2008, the automobile market underwent a massive expansion.”

The analysts forecast vehicle production in China this year will increase by about 2 million units to 21.5 million units, and by another 1.5 million units in 2015.

Tighter emission standards in China and emerging markets like India will also drive platinum prices higher, the analysts predict, given that platinum is a key component in catalytic converters, which reduce the toxicity of emissions. They point to a US$280 billion plan launched this year by the Chinese government to improve air quality. “Under the plan, most regions are required to cut concentrations of particulate matter 2.5 fine particles by 25% by 2017,” they note. “Efforts to reduce exhaust emissions are likely to require greater PGM loadings, given current technology.”

In the United States, “a crucial component of global platinum demand,” the analsyts expect auto production will grow 4.3% this year, 3.4% next year, to 11.33 million units and 11.73 million units, respectively. “Although China produces a significantly greater volume of vehicles, the domestic US auto industry absorbs nearly twice the amount of platinum as its Chinese counterpart,” they write. “This is due to the heavier weights and bigger engine sizes of most US vehicles, as well as more stringent emissions regulations.”

Investment demand and exchange-trade funds are also absorbing supplies of the metal, the report states. A  new platinum ETF launched in South Africa in May 2013  has soaked up about 953,000 oz. of platinum so far, the analysts say. Currently, total platinum ETF holdings stand at about 2.56 million oz., up about 60,000 oz. so far this year. “We are raising our forecast for ETF increases in 2014 to 250,000 oz. from our previous forecast of a gain of 150,000 oz.” They also forecast that non-ETF platinum investment in 2013 will be up by about 75,000 oz. and by an equal amount in 2014.

Other industrial demand will come from manufacturers of chemicals, glass, electronic goods and petroleum (the metal is the main catalyst in refining in the petroleum industry). The analysts cite an array of uses for the metal, including in the production of fuel cells, nitric acid, glass fiber, light-emitting diodes (LEDs), liquid crystal displays (LCDs), computer hard disks, multilayer ceramic capacitors, integrated circuits, and dental applications. They argue that industrial demand will reach 1.19 million oz. platinum this year, a 50,000 oz. increase from 2013.

Finally, the jewelry industry will increase its 2014 purchases of platinum by 100,000 oz. year-on-year to 2.1 million oz. of the metal. Here again China plays a significant role. The country makes up about 75% of gross global platinum jewelry consumption, according to HSBC. During the first two months of 2014, China’s imports of platinum were up 40% year-on-year. The analysts point out that “platinum is the favored wedding ring material in China” and that consumer spending in general in the country is expected to grow 8.1% this year and 8.3% next year, which “should be sufficient to support a modest increase in platinum jewelry demand.”