Platinum at $1,500 could be looking cheap by year-end

According to Johnson Matthey, platinum industry destocking is largely over and industrial usage is to pick up despite economic concerns

LONDON - 

The Johnson Matthey 2010 study of the platinum group metals records that jewellery took over from the auto sector as the largest component of gross platinum demand last year.  A jump of 950,000 ounces in jewellery offtake combined with a drop of more than a million ounces in auto demand to take jewellery to top slot with over three million ounces and 43% of total.

Jewellery demand is expected to fall in both China and Japan (although there may be some improvement in North America and Europe) this year and there are still heavy question marks over the European auto industry.  Johnson Matthey is however looking for rising  global platinum demand to outstrip steady growth in supplies during 2010, leaving the market close to balance.  Interestingly, the company's assessment of the market fundamentals show no net change in stocks over the course of 2005 - 2008 inclusive, but a rise of 285,000 ounces (equivalent to almost three weeks' net global demand) in 2009.

This leads to the suggestion that the 19% price fall between the 12^th and 21^st May, which has taken platinum to below $1,500 to five-month lows, may turn out to be a buying opportunity.  Obviously the markets are still very nervous in the wake of this week's heavy falls amid the turmoil in Europe and suggestions that the Chinese rate of economic growth is slowing, but it may well be that this price level will be left well behind by the end of the year.

One of the important factors to come out of this year's study from Johnson Matthey is the degree to which both the platinum industry itself, and the automotive industry, reduced inventory during 2009, laying the foundations for a healthy improvement in metal purchases this year (although there is evidence that some jewellers were reducing inventory early this year in the face of high metal prices).  Remember JM works on the basis of the equivalent of purchases and sales as opposed to production and consumption, taking account of inventory shifts.  The company defines "gross demand" for any application as the sum of manufacturer demand for the metal in that application and any changes in unrefined metal stocks in that sector. 

JM records a fall of 1.43 million ounces in gross demand of platinum in the auto sector last year to 2.23 million ounces, a contraction of 39%.  The fall in net demand was 45%, from 2.53 million ounces to 1.40 million.  Autocatalyst recycling fell by 300,000 ounces as scrap supplies were affected by the reduced number of new car purchases, exacerbated by the surge in scrap supplies in 2008 in response to high metal prices.  These falls would obviously have been larger had it not been for the scrappage schemes.  Tthe US "cash-for-clunkers" programme drew to a close in late August, but a number of European programmes are yet to finish and this is informing the view of many senior officials in the industry that European auto sales will be down by anything from 10% to over 20% this year.

Last year the automotive sector accounted for 32% of gross platinum demand and 25% of net platinum demand.  These figures compare with averages from 2005-2008 inclusive of 48% of gross demand and 45% of net demand.  Jewellery, however, as noted above, bounded higher, driven by a massive jump in Chinese demand.  Gross jewellery demand in China rose from 1.06 million to 2.08 million ounces, a jump of 96%, while the 57% increase in recycling, from 210,000 ounces to 330,000 ounces, meant that net jewellery demand more than doubled, from 850,000 ounces to 1.75 million ounces.  Chinese jewellery therefore accounted for 30% of gross global platinum demand last year and 31% of net global demand.  Chinese automotive demand is still an immature market and at 130,000 ounces, accounted for less than 6% of world automotive demand, but is on a substantial upward curve as tighter emission limits are rolled out across the country.

The fears of a slowing rate of growth in China has underlain a part of the sharp falls in the platinum price during the third week of May (although obviously it was not the only cause).  The Chinese jewellery market is highly price-responsive, both at the consumer end and at the fabricators and, with jewellery demand already slowing as prices pushed on through $1,600 earlier this year, the economic data that has emerged from China during May (rising inflation, slowing growth in manufacturers' activity indices) has undermined confidence in the platinum market to a degree.  The escalating turmoil in Europe and the German regulatory changes in late May triggered the very sharp falls and it is clearly arguable that platinum, at $1,500, has become oversold.

Whether fabricators are in the economic position, or have the confidence, to take advantage of this price fall to build some inventory, has to be debatable.  It is perhaps significant, however, that Johnson Matthey's study notes that "destocking [is] completed in most sectors" while "destocking is essentially complete in [the automotive] industry".  JM is therefore looking for working stocks of catalyst and metal to increase once more, while the company is also looking for a substantial turnaround in demand from the glass industry, following the closure in 2009 of several cathode-ray glass plants.  Because platinum is an in-process material in the glass industry (as it is in the majority of its other non-jewellery and non-auto uses) then the closure of these plants would have seen substantial return of metal from the industry.  Further such closures are not expected this year and with return to growth expected in the LCD and fire-glass sectors (platinum lines the bushings from which the glass fibres are spun off), platinum offtake in this end-use should pick up substantially.

Recycling is also expected to increase this year in both the auto sector and from the Chinese and Japanese jewellery industries.  After a recorded surplus of 285,000 ounces last year, Johnson Matthey is expecting the market to "return closer to balance" this year.  The company writes that concerns over the global economy and the pressure on the euro would be likely to put the price under pressure.  That has certainly developed in short order.  Strong physical demand was forecast into such a dip and while this has not yet developed in size, there is a good case for suggesting that this recent price fall represents a buying opportunity.

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plat I suppose madam/Ms you base this on the MSM's (i.e. your) continued punting of the 'global econ recovery' ? by pete laubscher on May 24 2010, 08:57 Find this comment inappropriate? Report it

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