TD Securities Head of Commodity Strategy, Bart Melek, says he expects PGMs to be star performers into 2013, “outshining other precious and base metals.”
Melek asserts that a “perfect storm” is brewing for PGMs as “robust demand growth coming from the auto catalyst market and other industrial applications, and a lackluster and uncertain supply outlook are projected to dramatically tighten the PGMs market in 2013.”
“Rising costs and resource nationalism in key producing nations, along with an increase in investor interest are additional factors that will likely support PGMs,” he advised. “Platinum and palladium should also benefit from their gold-like qualities, as investors continue to buy physical precious metals to protect against systemic risks associated with sovereign debt defaults, future inflation, and the U.S. dollar.”
Melek said he expects “palladium to shine the brightest due to its unique structural supply chain issues and technological advances boosting auto sector demand for the metal.”
He also forecast total platinum demand over the next three years “is projected to witness a period of uninterrupted increases, following a robust 2010. Demand is expected to post a 5.3% increase this year, follow by a 7.9% jump in 2012 and a 4.6% gain in 2013-all supported by Chinese jewelry sales and the auto sector.”
TD Securities expects platinum to average $2,000/oz (14% above spot) and palladium to average $1,000/oz (40% above spot) in 2013. “In sharp contrast, silver, gold and the base metals complex are project to slide lower over the same time period.”
“Our analysis shows that these two metals will likely have some of the tightest supply/demand fundamentals and be structurally attractive industrial commodities over the longer term, with existing primary deficits deepening,” Melek said. “Both platinum and palladium are projected to be in a market deficit situation as early as mid-2012 (palladium is already in a deficit), as industrial and investment demand growth outstrips the sector’s ability to increase supply.”
Platinum fabrication demand is expected to grow 19% over the next three years to about 8,500k oz., while supply is project to increase 10.4%. “The current structural deficit is expected to widen to roughly 1,900koz and the market deficit to 230koz by 2013,” Melek forecast.
“Similarly, palladium fabrication demand is expected to grow some 17% over the next three years to almost 9,900koz, supply is projected to increase 4.8%, which would generate a 3,300koz primary deficit and a 1,200koz market deficit,” he predicted.
However, TD Securities suggested higher prices will be needed over the longer term “in order to provide sufficient incentives to build green field projects, which are needed to balance supply with demand.”
“In addition, South African based producers are facing a challenging operating environmental due to a sky high ZAR…, rising power and labor costs, mine safety concerns and a difficult political environment,” said TD. “Zimbabwe may nationalize parts of its industry, which could destroy investment in the sector.”
As investors notice the tightening PGM fundamentals, “TDS expects more speculative funds to flow into the space, which will be supportive for prices-a sort of ‘virtuous circle’, where tight supply/demand fundamentals lift prices, higher prices increase investor interest which tightens supply/demand fundamentals and so on.”