Platinum Expected to See Fourth Consecutive Surplus in 2018

2018 should bring the platinum market its fourth consecutive surplus, led by a demand decline in the automotive sector, yet supply is expected to drop and possibly support prices, CPM Group said on Tuesday (July 10).

2017 saw another year of platinum surplus, which is defined as total supply, mine production and secondary recovery less fabrication demand. Current cumulative surplus stands at 13 million ounces, which is actually a decrease since its peak in 2006.

“Total platinum supply went down from its peak in 2006, [but] it still needs to decline further to be supportive of platinum prices,” said Rohit Savant, director of research at CPM Group.

According to the group, total supply for platinum in 2017 stood at about 7.5 million ounces, which is up from around 7.35 million ounces in 2016.

“Mine supply was the primary driver of total platinum supply in 2017, with secondary supply down for the year,” said Savant.

While secondary supply has stabilized in recent years, last year still saw a surplus as demand for the metal declined within the automotive industry.

“Decline in the past few years was primarily driven by reduced recovery of metal from auto catalysts in the US and Japanese auto-markets, where platinum was being substituted with palladium and gasoline engines,” Savant added.

The CPM group noted that one of the biggest challenges that platinum faced in 2017 was a lack of fabrication demand. In fact, fabrication demand has been flat for seven to eight years due to its excessive reliance on diesel engines.

“What we saw was a shift away from these cars, especially in Europe, so there’s been a pretty substantial decline in market share for the past few years,” Savant said.

He added that while India was starting to show some promise for platinum fabrication demand, it was also stepping away from the diesel care market share.

“Both of these factors have reduced the amount of platinum that is being absorbed by these diesel passenger cars,” he added.

Jewellery demand has also been declining for the past few years, to which Savant notes is, “primarily driven by weaker demand from the Chinese.”

On a positive note, CPM Group stated that fabrication demand declines were offset slightly by a growing strength in global commercial vehicle sales.

“This has definitely been a supportive for platinum fabrication demand,” Savant said.

Looking forward, the group believes that despite the ongoing platinum surplus, the excess will start to decline in 2018.

Weakness of platinum and strengthening of the rand is expected to weigh on platinum supply this year as is the decline in platinum production within South Africa.

“The forecast weakness that we have for South Africa mine supply is expected to help bring down the total supply during 2018 to about 7.4 million ounces, which is down about 1.2 percent from 2017 levels.”

Adding, “[l]ong term we think that the lack of capital expenditure in platinum mining, coupled with soft prices for platinum and cost pressures, especially in South Africa, are expected to weigh heavily on mine supply.”

Finally, the group noted that investor demand is down, with 153,00 ounces of platinum being sold in the first half of this year alone.

For palladium’s part, total supply rose to a record 9.67 million in 2017 and it is forecast to continue rising in 2018 to a total of 9.7 million ounces.

Savant stated, “the increase in total supply during 2017 was driven by both and increase in mine supply as well as secondary supply.”

He also noted that scrap supply has been on the rise for some time now, he stated, “because of higher prices, but mostly because of the increase [in] palladium loadings in autocatalysts…and improved recovery from electronics.”

Palladium mine supply also climbed in 2017.

“The metal is almost entirely produced as a byproduct of platinum, nickel or copper and palladium mine supply tends to be a lot less sensitive to its own price, which means that the current high price of palladium does not necessarily mean more palladium mine supply in the future,” Savant said.

“That lack of connection or sensitivity of palladium to its own mine supply is likely to be a positive fundamental for palladium in the medium term,” he added.

Savant ended on another positive note for palladium stating, “palladium is used extensively in gasoline engine markets and the demand for vehicles in the US and China, which are the two largest gasoline engine markets, has been growing strongly and continues to do so this year as well. This is definitely a factor that is supportive of palladium fabrication demand.”

As of 12:44 p.m. EST on Thursday (July 12), platinum and palladium were trading at US$841.00 per ounce and US$947.00 per ounce, respectively.

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