Metals Focus Delivers Optimistic PGMs Outlook - with a Few Caveats

During a platinum-group metals (PGMs) webinar, Metals Focus PGMs analyst Wilma Swarts explained that the precious metals consultancy is delivering its forecasts with the expectation that the COVID-19 pandemic will be under control in the coming months.

However, if the pandemic cannot be contained, the firm’s predictions will need to be reconfigured to account for the unprecedented uncertainty.

As it stands now, total platinum supply is expected to fall in 2020 by 1.1 million ounces year-over-year.

“Mine supply is forecast to be down by 13 percent; this reduction is made up predominantly by South Africa shedding 753,000 ounces to 3.6 million ounces, its lowest level since the strike affected 2014.”

One of the main contributors to the South African output reduction is the shuttering of Anglo American Platinum’s (LSE:AAL,OTC Pink:AGPPF) Phase A convertor, which happened in February following an explosion. No one was hurt in the blast.

According to Metals Focus data, most end-use segments for the white metal are expected to see a decrease in demand, while physical investment and glass demand are forecasted to see an uptick.

“Based on our 2020 outlook for platinum, we forecast platinum to remain in a physical surplus of 247,000 ounces, adding to the current aboveground stock, which is estimated at 9.6 million ounces,” said Swarts.

Refineries are anticipated to return to full production before mining operations, resulting in an inventory drawdown that Swarts believes will help moderate the impact of lockdown restrictions. But she noted that it is too early to quantify at this stage.

In March, platinum fell to US$588 an ounce, a low not seen since 2002. Weak prices have resulted in a decrease in recycling as owners opt to hold on to scrap and old jewelry until the price is higher.

The recycling sector is expected to be down 12 percent in 2020 — the largest year-over-year drop since Metals Focus began publishing its research.

On the other hand, in terms of price, platinum is expected to benefit from the bull market in gold.

“We are cautiously optimistic about the price outlook due to the boost from gold later in the year; Metals Focus is bullish on gold, which we expect will benefit from ongoing uncertainty and loose monetary and fiscal policies,” notes Metals Focus in its PGMs outlook for this year.

While platinum recycling is expected to slip in 2020, palladium recycling hit an all-time record of 3.2 million ounces last year, a number that Swarts says could have been higher if not for some supply chain bottlenecks throughout the year.

The vast majority of the increase was the result of an uptick in autocatalyst recycling, which accounted for 27 percent of global supply in 2019.

“For 2020, we anticipate palladium supply to drop by 8 percent, to an eight year low of 9.5 million ounces,” she said. “South Africa will shed 383,000 ounces and Russia 138,000 ounces.”

A reduction in recycling tallies is also expected.

“Recycling will be down by 6 percent as palladium from spent autocatalysts will drop to 2.6 million ounces. It will still be the second highest palladium recycling number ever,” she added.

Industrial demand is also forecast to fall in 2020 by 9.1 percent to an all-time low of 1.6 million ounces.

Ultimately, Metals Focus sees the palladium story having two parts this year. The first will be marked by oversupply, while the latter half will be punctuated with deficits and tighter conditions, resulting in a return to bullish price conditions.

After reaching what is considered its peak of US$2,754 an ounce earlier this year, the metal fell as low as US1,728 on May 14; it has since rebounded and was trading for US$2,022 as of Wednesday (May 20).

“The annual average palladium price is forecast to rise 48 percent as the bullish impact of tight aboveground stocks gradually overcomes the drag of COVID disruptions towards the end of the year,” explained Swarts.

While palladium pulls itself out of the weeds, platinum is expected to slip 11 percent by the end of the year due to an ongoing surplus — and despite the help from gold.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.