METAL COMMENTARY — PGMs expected to withstand downtrend in gold markets

The gold market is grey and gloomy, and today its sages are competing to see who can come up with the lowest forecast price. But even as gold market watchers enjoy a good old-fashioned game of one-downmanship, market conditions look unusually good for most of the other precious metals.

A preliminary review by Johnson Matthey, the refiner and trader of precious metals, argues that platinum and related metals are likely to be in short supply for most of 1998.

The past year has seen several panic-buying phases in the platinum-group markets, chiefly arising from fears that Russian production may decline.

Financial problems and a threatened strike at the huge Noril’sk mining complex in Russia drove London platinum prices to US$495 per oz. in early June and to US$444.50 in mid-August.

Johnson Matthey sees political and financial problems causing more interruptions of Russian exports in 1998, leaving the platinum market in deficit for much of the year. Furthermore, the refiner believes Russian platinum inventories are drawn down to nearly zero, which will mean that supply on the world market will be affected more by Western producers, mainly in southern Africa and North America.

World platinum production is expected to fall just short of 4.8 million oz.

in 1997, with South Africa producing more than three-quarters of the supply.

Production in 1996 was just less than 5 million oz.

Johnson Matthey projects total demand at 5.1 million oz., and has predicted that the metal will trade in the range of US$400 to US$450 in the first half of 1998. Demand from the jewelry and electronic industries has grown substantially.

Further supply problems in Russia are expected to have their most marked effect on the palladium markets. The automotive parts industry is now palladium’s biggest consumer, making up about 40% of the projected 7.4 million oz. consumed in 1997. Palladium catalytic converters now outnumber their more expensive platinum counterparts, and their share of the market continues to grow.

Meanwhile, this year’s mine production is expected to reach only 5.7 million oz., largely because of supply interruptions from Noril’sk. The other major producing countries are not expected to be able to compensate for the slowdown in production from Russia.

The slack in the market will probably be taken up by sales of above-ground stocks; the Russian central bank and State Fund both have palladium holdings to sell. Johnson Matthey expects the holdings to last three to four years, if they are not replenished.

The other platinum group metals are also likely to be in short supply.

Johnson Matthey is predicting that rhodium prices should be stable as both demand and supply fall slightly. The metal has traded in the US$300-to-$360 range for most of 1996 and 1997. Iridium prices, now in the US$240-to-$290 range, have been less settled over the past year and are on an upswing.

The World Gold Council notes, in its most recent quarterly report, that demand for physical gold is at record levels, particularly in Middle Eastern and South Asian markets. Gold sales this year through Dubai, United Arab Emirates (long the principal trade market for gold destined for the Mideast and South Asia) are almost double those handled in 1996.

The council suggests that the crash in gold prices has spurred demand just at the time of year when consumption by the jewelry industry is at its peak.

Silver has also been climbing back from its July levels, when it touched US$4.22 per oz. Warehouse inventories on the New York and Tokyo commodities exchanges are low, and the white metal is enjoying renewed attention from precious metals funds.