William Tankard of Thomson Reuters shares his latest thoughts on what’s been driving the platinum market and what to expect for the remainder of 2015.
For our 2016 platinum price forecast, please see Platinum Price Forecast 2016: Market to Balance.
At the start of 2015, analysts were calling for a rosier future for the platinum price forecast.
Sergey Raevskiy of SP Angel — among many others — saw the platinum price averaging US$1,500 per ounce for 2015 on the back of stronger demand and tighter emissions restrictions in Europe. Together, those factors were expected to increase demand for platinum used in catalytic converters.
However, that hasn’t happened. Platinum has remained cheaper than gold since mid-January, and is down 18 percent since the start of 2015. There’s not much hope for the metal to make a meaningful rebound before the end of the year.
To find out more about the situation, the Investing News Network spoke with William Tankard, director of precious metals and mining at Thomson Reuters (TSX:TRI,NYSE:TRI). He shared some of his latest thoughts on what’s been driving the platinum market and what to expect for the remainder of 2015.
So far in 2015
“We certainly did not foresee the severity of the fall,” Tankard said. “Earlier in the year, we were calling for platinum to trade down to $1,000, and it broke through that level. So obviously that has overshot the projections that our analysts put forward back in May.”
What’s behind the dive? Tankard said investor sentiment has played a not-insignificant role, but noted that plenty of factors have led to market uncertainty this year.
Specifically, he pointed to the “increasing rhetoric around the specter of the Federal Reserve beginning to look at tightening rates,” in addition to “ongoing sluggish growth in Europe and increasing uncertainty in China [tied to] the market crash in recent months and worries around how that is likely to trickle through to the country’s broader economy.”
Beyond that, a broader sell off in the commodities space has put pressure on the platinum price as well.
Tankard noted that China is an especially important market for platinum. Platinum jewelry in particular, he explained, is “very much dependent on Chinese consumers’ discretionary spending on luxury goods trickling through to them buying, or continuing to buy, meaningful quantities of platinum jewelry.”
Production cost curve
“In terms of producers’ costs and marginality right now, you have the quite bizarre situation with prices where they are,” Tankard said. Looking at the cost curve, he noted that at $950, three-quarters of the platinum-producing industry is failing to cover its costs and sustaining capital.
“That’s not talking about project capex expansions, that is simply asking the question, ‘are they just focusing on their mid- to medium-term production plans that would lead to the ongoing health of an operation?’” he clarified. “And right now three-quarters are underwater.”
Of course, investors and market watchers might be hesitant about how sustainable such a situation might be, and for his part, Tankard doesn’t see South African producers materially reducing their costs without taking production out of the market.
“So then one has to ask, is it going to be the price that responds first, or is it going to be production that falls, and then begins to stimulate the price? I worry that it is probably going to be the latter,” he said. “We do need to see capacity taken offline.”
Certainly, that’s already started to happen, with Glencore (LSE:GLEN) finally closing its Eland platinum mine in South Africa.
What’s next for the platinum price forecast?
According to Tankard, Thomson Reuters doesn’t see things looking up for the platinum price in 2015.
“We are relatively pessimistic that the industry in South Africa will act quickly. And that very much speaks to us maintaining quite grounded forecasts for 2015 and 2016,” he said. “We see an average in Q4 of $950, which points to an annual average this year of $1,065.”
For 2016, the firm sees the platinum price averaging slightly lower, around $1,050. “So at the moment we’re pretty grounded on our price expectations. We think on the balance of probability it does favor upside here. But we don’t really see any dramatic rallies coming through just yet.”
What could trigger an upside move? Tankard stated that while Glencore certainly isn’t the only company to have announced reductions in platinum production — Lonmin (LSE:LMI) has been talking about it too — more production needs to be scaled back to improve the price and investor sentiment.
“We have already seen a few announcements around that, but I think that there will have to be more to come if prices don’t improve in relatively short order,” he explained.
Furthermore, he’s optimistic about initiatives by some producers that believe they can run operations more efficiently. Sibanye Gold (NYSE:SBGL) in particular has been making big plays in the platinum space with its purchase of Anglo American Platinum’s (JSE:AMS) Rustenburg operations and its acquisition of Aquarius Platinum (ASX:AQP).
“I think if you do see more mines being taken out of production or downscaled, then that would also serve to introduce more investor confidence and investor enthusiasm towards the metals at a time when they’ve very much taken a beating from investors over recent months,” he concluded.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.