Platinum is on track for another year of deficit, but what else is ahead for the precious metal in 2017?
Platinum reached its fifth consecutive year of deficit in 2016 and is expected to continue this trend in 2017, supported by cuts in mine production.
Despite prices rising in the first months of 2016, platinum underperformed other precious metals. However, forecast from analysts is still positive for the year ahead but with caution, due to the known price volatility of the metal.
Paul Wilson, chief executive officer of the World Platinum Investment Council, said: “The overall picture for platinum in 2016, which has enjoyed a significant rebound in price over the course of the first half of the year, continues to be one of constraint and ultimately deficit in 2016.”
Price Rebound Ahead
Platinum saw gains during the year jumping to $1,162 per ounce on August, its best monthly performance since 2012, but falling again in the last quarter to end the year almost neutral at $901 per ounce.
A strong US dollar put most of the pressure on the metal, but decreasing investment and jewelry demand also hit platinum.
“We would refrain from buying (platinum or palladium) at this point in time,” Julius Baer analyst Carsten Menke said. “We have become more cautious on the demand backdrop, primarily related to autocatalysts and jewelry.”
But HSBC analyst James Steel said: “The declines in the platinum group metals are steep but we do not see a clear fundamental reason for the drop and suspect they were down in low volume.”
Platinum is forecast by HSBC to average $1,075 an ounce next year, although this is down from the bank’s prior forecast of $1,195 an ounce.
Societe Generale projects platinum averaging $1,040 in 2017 while TD Securities looks for around $1,100 platinum in 2017 and $1,225 the year after.
“We’re positive on the platinum group metals, and we have been for some time,” said Mike Dragosits, senior commodity strategist with TD Securities.
Coronation Asset Management and Investec Asset Management’s view that a long-term supply crunch in South Africa, which produces 70 percent the world’s platinum, will boost prices.
“A supply cliff is approaching so we see substantial deficits in the years ahead, and much higher platinum-group prices as a result,” John Biccard, a Cape Town-based fund manager at Investec, told Bloomberg.
Deficit to Continue
According to the WPIC, the platinum market will shrink to its narrowest since 2011 this year, due to a drop in investment interest and a declining share of diesel vehicles in the European car market.
The global demand for platinum, that is used in catalytic converters, laboratory equipment and jewellery, is forecast to decrease by 3 percent year-on-year to 8.04 million oz.
The projected growth in jewellery demand will not be enough to make up for the expected declines in automotive, industrial and investment demand.
“There are massive shifts beginning to emerge in both the supply of and demand for platinum and palladium,” CPM Group said in its Platinum Group Metals Yearbook 2016.
“Automotive use of platinum and palladium is changing, shifting away from platinum toward more palladium and toward non-Platinum Group Metals (PGM) using technologies.”
The WPIC also cut its expected platinum market shortfall for 2016 to 170,000 ounces from the 520,000 ounces predicted in September, citing a larger than expected drop in Chinese platinum jewellery demand, and higher recycling.
“It’s all good and well to say that metal is available from above-ground stocks, but as soon as the vaulted holdings aren’t for sale, any deficit makes for concern, especially from industrial users,” the WPIC’s director of research Trevor Raymond said.
In the second half of the year, automotive demand increased and right now expectations are for healthy automotive demand in 2017.
“In most industrial sectors, the demand outlook remains firm, but purchases in the autocatalyst industry are likely to dip slightly as lower-platinum-loaded catalyst systems are introduced in increasing numbers in European vehicles,” world’s largest platinum and palladium refiner Johnson Matthey said.
Supply Crunch Expected
South Africa is the world’s top platinum-producing country and holds the largest-known reserves of platinum group metals globally. But mine production dropped this year due to mine stoppages, falling by 5.7 percent year on year and 4.5 percent month on month in October.
Last year, the Association of Mineworkers and Construction Union (AMCU), that led a 20-week strike in the first half of 2014, declared a dispute on wage negotiations with the top three global producers Anglo American Platinum, Impala Platinum and Lonmin which together account for 60 percent of global platinum output.
Moddy’s Investors Services said the platinum industry should see some stability next year thanks to the new three-year wage deal in place.
Despite this and according to Economic Calendar, the decline in production is doing little to impact prices. The decrease in production is likely due to platinum prices not being enough to support some of the expensive South African platinum production.
There will probably be more mine closures because companies haven’t made enough long-term investment, said Natixis SA.
“Every single company has cut capital,” Terence Goodlace, CEO of Impala, told Bloomberg. “Supply will inevitably drop off towards the end of this decade, and quite dramatically after that. I think the market has missed this.”
It seems that platinum market could tighten even further if supply cuts continue in South Africa, bringing a boost in prices sooner than expected. But investors should also keep an eye on the US dollar, as a stronger greenback could pressure the precious metal. The new year has started well for platinum and this might be the trend for the next few months.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.