Changes could reduce platinum usage in automotive sector

Platinum prices are now at a more realistic level than hitherto following an announcement of an emission control catalyst which could cut pgm loadings in half.

LONDON - 

Platinum prices dropped by $30 at the end of last week in a move triggered by an announcement from Nissan Motor Company that is has developed an emission control catalyst for gasoline-fuelled cars that could halve the platinum group metal loadings currently in use. 

Thrifting is a persistent policy of automakers and catalyst manufacturers in an effort to maximise efficiency and minimise costs and the automotive sector is the most important usage for both platinum and palladium.  The latest Platinum and Palladium Survey from GFMS Ltd. records usage of 4.17 million ounces of platinum in the sector in 2006, equivalent to 54% of total industrial and jewellery demand, while demand for palladium was 4.46 million ounces, 56% of total.  Scrap recovery, meanwhile, amounted to 855,000 ounces of platinum and 764,000 ounces of palladium.  Scrap recovery in both metals is on the increase as a function of the growth in demand since catalysts were first fitted (initially in the US in the mid-1970s).  Platinum return is rising steadily, while palladium return is set to soar in the next few years, reflecting the hefty increase in palladium offtake, notably in the US, in the late 1990s and the start of this decade.

Nissan's announcement generated substantial fund-led liquidation, but the move should be set in context.  The market has been watching South African developments closely over the past few weeks, concerned that any strike action would prompt renewed tightness in the market.  The investment bank UBS noted last week that inventories in Zurich have been falling and may be down towards the levels prevailing when prices spiked in late November on rumours of an imminent Exchange Traded Fund.  The subsequent announcements, in Spring this year of two such funds, were greeted in more sanguine fashion and there was no repeat of the spike - although this was helped to some extent by sizeable shipments of metal into Zurich towards the end of last year. Current holdings in these funds amount to more than 50,000 ounces and the market has easily been able to handle investors' requirements.

South African mine production of platinum in 2006 was 5.45 million ounces, or 71% of world demand and some elements of the market have been concerned about the possibility of strike action.  Disputes have been declared at most of the major houses (these are necessary precursors to strike action, but do not mean that strikes are inevitable), and the market was also slightly unnerved in mid-July by the statement from Lonmin that it will produce between 920,000 and 940,000 ounces of platinum this year rather than the originally planned million-plus, as a result of the changing ore mix at Marikana.

These factors all helped to contribute to platinum's upward march from the late-June low of $640 to the recent high of almost $688 last week.  It has been important to note, though, that platinum borrowing rates have not risen during the period - if anything, in fact, they have eased slightly, and this has underpinned the fact that much of the recent increase in prices has been driven by investment and speculative demand rather than industrial consumers seeking to lock in liquidity.  The latest Commitment of Traders figures show that the net long speculative position on NYMEX at the close of business last Tuesday 24^th July (the latest date for which figures are available) stood at a record 736,000 ounces.   NYMEX is a centrally-cleared Exchange and therefore for every long the is also a short, but this is a high speculative overhang and if an avalanche of selling offers develop then it becomes a buyers' market.  At the end of last week the buyers were content to let the offers come.

Furthermore, one-month rates currently stand below 2%, which does not reflect nervous tightness.

The latest Nissan development, which is being developed in joint venture with Renault, is to be introduced in new vehicles due to by launched from fiscal 2008 (year-ends March 31^st 2009).  The company reports that the catalyst is as effective as existing products, using nano-technology that prevents the metal particles on the catalyst from clustering up in high-temperature conditions and thus reducing their effective surface area

The market's sell-off, if it had been purely on the back of this announcement, would therefore be a clear-cut case of over-reaction, exacerbated by stop-loss and technical selling.  When set into the context of the build-up speculative pressure, however, it is more understandable and it is clearly arguable that platinum is now at a fairer value than in recent weeks.

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