Platinum’s prospects tied to world economic activity

Platinum, which characteristically has the attributes of both a precious metal and an industrial metal, ended 1990 on a subdued note. In many ways, last year can be thought of as two distinct halves. In the first half, optimism about demand (particularly in the autocatalyst market) outweighed the negative influence of a declining gold price. In the second half of 1990, the price was dragged up by a resurgent gold price in the wake of the Gulf crisis, but this proved to be short-lived. Not only did the global economic slowdown call into question some of the more sanguine demand growth projections, but the market was also forced to focus its attention on the extremely large supply increases that are planned over the next five years.

This bearish sentiment was reflected in a year-end closing price of US$412 per oz. which was not only a fall of 17.3% over 1989, but also the lowest level it had traded at since early 1986.

Principally, because of the near monopoly that the South Africans and Soviets have on production, the platinum market is by no means as accessible or transparent as the base metal markets.

To a large extent one is dependent on the platinum reviews which are published by the metal fabricator Johnson Matthey, which anticipated that demand would reach 3.6 million oz. in 1990 with supply increasing to 3.67 million oz. Hence it states that the resulting surplus in supply of 70,000 oz. will be the first since 1984.

There is no doubt that the Johnson Matthey reviews are both extremely authoritative and detailed, but it is worth bearing in mind that they are ultimately controlled by the South African conglomerate, Anglo American, which has a vested interest in ensuring a stable market. Thus it is best to maintain a health skepticism with respect to their numbers as many other market commentators expected a supply surplus in excess of 300,000 oz.

The other question that arises is that if there has been a supply deficit for the last five years, it seems rather odd that the price peaked in 1986 and has been in a gentle downtrend since then.

In terms of demand by application, the largest growth (3.9%) for 1990 was recorded in the autocatalyst industry which used an estimated net 1.34 million oz. Although autocatalyst demand in North America fell, this was more than counterbalanced by a strong increment in Japan and Western Europe. The latter region should also continue to show strong demand over the next few years as the EEC is, rather belatedly, adopting the more stringent emission standards which have been commonplace in the U.S. since 1983.

Over the longer term, environmental protection statutes will also probably be adopted in Eastern Europe and the USSR and this should continue to entail very respectable demand for platinum in autocatalysts.

Although autocatalyst demand accounts for 37% of usage, remarkably it is eclipsed by jewelry demand which is estimated to have reached 1.35 million oz. in 1990. The lion’s share for platinum jewelry demand emanates from Japan, which has long had an affinity for platinum jewelry which is in strict contrast to its neutral attitude towards gold.

Annual compound growth in platinum jewelry demand in Japan has grown by a staggering 13.5% over the last five years. With Japanese GDP growth of almost 6% this year, the trend has continued, but the fear remains that this may potentially be the weakest area of demand next year as GDP slows to an estimated 3.5% or possibly lower.

Other areas of demand application for 1990 such as the petroleum, chemical, glass and electrical industries remained relatively flat. Platinum for investment purposes further dropped from the depressed levels of 1989 to an estimated 100,000 oz. last year.

South Africa, with last year’s production standing at just under 3 million oz., accounts for three quarters of global production. This production is set to increase steadily. The world’s largest producer, Rustenburg, will progressively bump up its production by 200,000 oz. by the middle of the decade. Likewise, the number two producer in the pecking order, Impala, announced it had increased its production by 35,000 oz. in the financial year ended June, 1990. Furthermore, it is Impala’s intention to expand its production from 1.08 million oz. to 1.35 million oz. over the next five years.

Meanwhile, Western Platinum, a subsidiary of the British conglomerate Lonrho, is also jacking up its production substantially. Smaller operations such as Northam and Barplats are also on the expansionary track.

Obviously, if the demand side does falter, the South African producers should scale down their expansion plans, but this may not occur to the extent that is required. The principal reason that this may not happen is because of another platinum group metal, rhodium.

Unlike platinum, more than 85% of the rhodium produced is required in the autocatalyst industry. As the spread of controls on emissions and the tightening of existing standards continue, demand will remain firm for the foreseeable future.

In November of 1989, the price of rhodium was chugging along at $1,200 per oz., but then refinery problems at Rustenburg triggered a phenomenal increase in the price. Even at the end of the year it was comfortably trading at US$5,400 per oz. The South African platinum producers enjoyed good profit margins before this rise and the platinum price would have to now fall to below US$300 before they had reason to become seriously concerned about their operations.

As for the USSR, its need for foreign exchange has kept its shipment to the west at the same level as 1989, namely 580,000 oz. Production outside the USSR and South Africa is minimal and only amounts to some 70,000 oz., with the bulk of that coming from the Stillwater mine in Montana.

Considerable exploration occurred in 1990 in order to prove up viable platinum deposits in Australia, North America and Zimbabwe. The most promising project appears to be the Madeleine Mines (TSE) venture at Lac des Iles in northwestern Ontario. In view of the instability in South Africa and the USSR, the benefits of a platinum mine outside these areas is only too self-evident.

Prospects for this year are dependent on the severity and length of the global economic slowdown and the recessions in the Anglo Saxon countries. If, as current thinking has it, the worst is over by the middle of the year, then platinum should average between US$425 and US$450 for 1991. On the other hand, if it takes the world a little longer to regain some economic health, the prospects for platinum are not particularly attractive.

There is no sacrosanct law which says that platinum will always trade at a premium to gold. It is worth remembering what happened in the last U.S. recession in 1982. Platinum at one stage traded at a $130-per-oz. discount to the gold price.005 0000,0606 John Taylor is a mining analyst with U.K. securities firm James Capel in London.