PLATINUM GROUP METALS
Long-term platinum fundamentals looking good - Johnson Matthey
While prices may have fallen around 11% in recent months, there are indications that platinum could be bottoming out.
Posted: Tuesday , 27 Jul 2010
The price of platinum has fallen around 11% since hitting a 21-month-high in late April, largely on the coat tails of the sovereign debt crisis in Europe.
But, according to Johnson Matthey's GM for Market Research, Peter Duncan, both the supply and demand side of the market would suggest the metal is likely to maintain its current level, if not go higher during the course of the rest of the year.
Speaking on Mineweb.com's Metals Weekly podcast, Duncan declined to give an actual forecast but, said, "Supply at best is going to grow a little bit - it's certainly being hit by a number of issues and it's going to struggle to grow at a fast rate".
On the demand side, he said there is some uncertainty as to whether we are likely to experience a double-dip but, added, " I would certainly expect demand to be stronger this year in all the industrial applications than it was last year. Jewellery remains quite firm and investment demand likewise seems to be quite sticky.
"So the demand side seems to be holding up quite well and all of that points to a market that is moving closer to balance than last year.
The big story over last week was the directive out of the South African government's department of mines about the bord and pillar mining technique and, more specifically, about the space between the pillars. The directive was aimed primarily at Aquarius Platinum, which uses the technique more than most and had just suffered two fatal accidents at its mines.
While the knee-jerk reaction from the market saw Aquarius's shares plummet, it has subsequently recovered some of its value and, according to Duncan it is too early yet to say what the actual impact of the directive will be.
"The producers themselves are still struggling to interpret exactly what's required and how they're going to handle it. But if you look at the overall production from the area that's immediately affected, we're talking about platinum and chrome mines in the North West region - the Western Bushveld, south and east of the Union Section - so that amounts to a total annual production of platinum of just under half a million ounces. So it's going to be a percentage of that. I've heard different figures of up to 20%, 25% and down to virtually nothing - the 20%, 25% is probably an exaggeration and more likely we're going to see [a drop of] 10% to 15% - it's a bit early to say but I'd be very surprised if it were more than 100,000 ounces a year".
Over and above the potential impact of more pillars underground, Lonmin too came out with an announcement saying that its refined platinum sales were down almost 50% and, as Duncan says, there are certainly a lot of one off announcements in the platinum sector: "We always call them one-off but they seem to happen every year, don't they. There's always some little bit of bad news that dents production"
But he still expects some modest growth in overall South African platinum supply.
Asked about other sources of supply, he says Russian and North American supply is expected to remain fairly consistent.
"The growth potential, all other things being equal, is in Zimbabwe where there are still significant reserves of platinum and where they're growing in percentage terms, quite strongly in the last few years - but obviously that has its own potential difficulties going forward."
While auto-sector demand for the metal still makes up around half of current usage, Duncan points out that last year there was a dramatic fall off in auto usage and jewellery rose to fill the gap, becoming over 40% of the total market.
And, he believes that there is still a long way to go on the jewellery front. "
"The biggest market by far for platinum jewellery is China - although demand has fallen off a bit this year - that's hardly surprising because we saw a large period of stock building in the first half of 2009 which is unlikely to be repeated. But the underlying demand in China is still very strong, and almost irrespective of price, we see that that has a long way to go before it approaches any ceiling," he says.
From an autocatalyst point of view, which remains the major source of platinum demand, Duncan says the most important thing to focus on is the diesel car's share of the European market which dipped quite significantly last year.
"What's really going to be important going forward, is how quickly the diesel share of the market recovers. We're certainly seeing signs of diesel recovery so far on the fleets, which are typically dominated by diesel, so those are starting to come back in. So really, going forward it's a case of European diesel share recovery driving platinum demand and at the same time, in the same way that the industry ran down on the stock of vehicles - production fell last year by a lot more than sales fell. This year it will be the opposite - we'll probably see a build up again of car inventories and of course that will drive demand for PGMs and catalysts, so overall a fairly positive picture but seeing into the future at the moment is quite difficult.
The third prong of the demand trident is also the youngest - ETF or investment demand. Here Duncan admits that there is very little history on which to judge the way that they'll behave to movements in price.
But, he adds, "So far we've seen significant growth in ETF investment this year, after the launch of the US-based ETF fund. How much of that of course is pent up demand and how much reflects what demand will do going forward is a little bit more difficult to say.
"Certainly the demand - the rate of growth in cumulative holdings has fallen, but there's no real evidence here that people haven't taken any profit and in fact the cumulative demand in ETFs has just grown irrespective of what price has done - so we saw no or very little exiting of positions when the price dropped recently and the curve has continued to go smoothly upwards. ETF investment - difficult to say what's going to happen long term but so far, it's looking fairly sticky, as we say - it's looking to hold onto the platinum that it's bought."