May has seen the release of Johnson Matthey’s (JM) Platinum 2012 market review and the Platinum & Palladium Survey 2012 from Thomson Reuters GFMS. These industry reports have differences, but they also have two notable similarities with regard to market outlook. Both project that the platinum market will be in surplus in 2012 and that prices will trade within a similar range.
In 2011, platinum supply rose 7 percent to 6.48 million ounces (oz). Demand also rose, up 2 percent, or 8.1 million oz. Yet according to JM data, the market was still oversupplied by some 430,000 ounces. This is because, significant in the supply picture for 2011, recycling increased by 12 percent and added an additional 2.05 million oz.
Though there is another surplus predicted for 2012, it is associated with different circumstances.
Contributing to the growth in supply in 2011 was a 75 percent increase in platinum output from North America as operations normalized at mines owned by Vale (NYSE:VALE) and North American Palladium (AMEX:PAL,TSX:PDL) following disruptions that occurred in 2010. Supply from Zimbabwe rose 21 percent largely due to Anglo American (OTC Pink:AAUKY,LSE:AAL) commissioning the Unki mine. From the lead platinum producing nation, South Africa, supply rose about about 5 percent.
This year will lack that strong contribution of new and returning-to-market platinum mine production.
Also, though platinum supply from South Africa rose in 2011, production among the nation’s miners actually declined 3 percent, or about 120,000 oz, largely due to safety stoppages and labor disputes. The increase in metal sold to the market was the result of companies shaking platinum out of their pipelines. Given the extent to which this was done in 2011, there remains limited flexibility for platinum miners to fall back on existing sources this year.
The production issues in South Africa could actually be bullish for the market. Impala Platinum (OTC Pink:IMPUY,LSE:IPLA) has already lost an estimated 120,000 oz in 2012, following a six-week shutdown in Q1. The company is currently losing some 3,000 oz per day due to union rivalry. And, safety stoppages and labor disruptions are expected to continue as part of the reality of doing business in South Africa.
Platinum recycling is also expected to fall off this year. JM has reported that declines have already been witnessed thus far.
At the CPM Group Precious Metals Conference, analyst Erica Rannestad pointed out that part of the recycling decline can be attributed to the technology shift in the 1990s whereby palladium was substituted for platinum. As a result, autocatalysts that have less platinum in them are starting to be seen.
But what seems like a potentially bullish supply picture is being met with a sketchy demand picture.
Both GFMS and JM highlight the EU crisis as a major downside risk for the market since Europe is a platinum-rich autocatalyst market.
GFMS says that the likelihood for material growth in overall fabrication (especially in the core autocatalyst and industrial areas) appears remote, suggesting another large gross surplus.
JM, also foreseeing flat autocatalyst demand, notes that last year there was strong demand from the electronics sector to make LCD glass. Many manufacturers were then purchasing for future expansion, but a repeat of this appetite is not expected in 2012.
Furthermore, conditions in Europe have the potential to not only truly affect fabrication demand, but to also severely affect investor sentiment, which in turn could negatively impact investment demand.
Investors are already showing an inclination to prioritize economic conditions as they are largely ignoring the risky supply story.
In addition to reporting physical metal selling, Rannestad said that platinum holdings in ETFs are down about 3 percent, or 40,000 ounces, since March.
There has also been a significant build up of short positions in NYMEX futures. Approaching 600,000 oz, Rannestad described the situation as unprecedented.
There is a risk that the current weakness in the market could have a domino effect, dragging prices lower.
During the analyst presentation for their report, Peter Duncan, General Manager of Market Research for JM, said data shows that investment interest in 2010 was balanced regardless of whether the market was moving up or down. 2011, he says, was the first time JM observed a “traditional western pattern” among platinum investors, which involved buying into a rising market and liquidating as prices fall.
Weak positioning in ETFs and futures in 2011 was often accompanied by further weakening prices.
Still, even with a surplus and substantial liquidation from mid-September, platinum managed an average price of $1,721 in 2011, representing a year-on-year increase of 7 percent.
Platinum prices are currently sitting at about $1,416.
GFMS expects platinum to trade in the range of $1,475 to $1,775 over the course of this year. JM foresees the metal trading between $1,450 and $1,750, averaging $1,600 over the next six months.
Even with the possible downside risks, JM expects that at the least the platinum market will find support at the lower end of the price range from strong buying in the Far East, which Duncan says is already being seen.
GFMS sees a possibility that platinum will receive spillover benefits from an expected increase in gold investments in the second half of 2012 and also from cost pressures on South African miners.
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.