After bottoming out in the wake of the 2008 financial crisis, platinum is regaining lost ground and positioning itself for a global recovery.

In March 2008 the platinum price peaked at an all-time high of $2 276 an ounce, driven by the prevailing commodity boom and underpinned by major supply concerns, particularly in South Africa, where the platinum industry was contending with acute electricity shortages, a scarcity of skills and various operational and safety related difficulties.

These heady market conditions came to an abrupt halt in July as the US sub-prime crisis triggered a collapse in global financial markets and the worst economic recession in recent times. The world automotive industry - which absorbs around two-thirds of global PGM output for use in autocatalysts - was severely impacted.

Plummeting vehicle sales accompanied by massive investor liquidations of metal resulted in the platinum price dropping to a low of $756 an ounce in October 2008.

Perhaps predictably, the lower-price environment for platinum proved an ideal buying opportunity for both investors and the "platinum-loving" Chinese jewellery community. As early as the third quarter of 2008, demand for platinum began to show signs of revival as Chinese retailers and manufacturers rebuilt their jewellery stocks. Many retailers cut prices of old high priced inventory to stimulate sales.

Toward the end of the year Japanese investors showed strong interest in platinum bars on the back of a low dollar price and a strong yen, resulting in a shortage of these products.

Exchange traded funds (ETFs), which are backed by physical metal, also took the opportunity to rebuild their positions in this lower priced environment. This trend has continued through the first half of 2009, resulting in investment interest in such funds returning, and even exceeding, pre-crash levels.

With the world economy in crisis, platinum demand shrinking on the back of lower vehicle sales and additional recycled metal coming from old Japanese jewellery, the scene was set for an oversupply of metal. However, failures by PGM producers in meeting production targets brought the supply/demand balance back to relative equilibrium.

South African operations troubled by electricity supply issues and various operational setbacks, Russian producers contending with sharply lower grades and processing difficulties, and the first mine closure in North America kept at least 0.5 million ounces off the market.

The combination of lower prices and unfavourable exchange rates has created a difficult environment for many new South African platinum projects and several have been delayed or even shelved. This, together with the current dearth of capital investment in the industry, will restrict the growth of future supply as demand for PGMs recovers towards previous levels.

The gradual recovery of the world economy, with the inevitable revival in industrial production and consumer demand, will be the single biggest driver of platinum PGM demand over the medium to longer term.

Other drivers of demand that will have a positive effect on the PGM market are:

• Tighter auto-emission legislation
  Emission legislation has now spread to countries outside the developed world creating growing demand both in terms of the larger number of autocatalysts required as well as increased loadings of PGMs per catalyst in order to meet ever tightening regulatory obligations. At the same time the legislative net is widening to include older vehicles as well as a wider range of equipment such as motorbikes, construction vehicles, lawnmowers and marine engines.
• Incentives to scrap old cars
  Governments in Europe, China, Brazil and more recently the US are incentivising the scrappage of older motorcars. This will serve to stimulate new-vehicle sales in the short-term and consequently strengthen PGM demand. However, this could be mitigated in the medium-term when these incentives fall away.
• Consumer demand for jewellery
  Asian buyers, who were relatively sheltered from the financial crisis, are expected to continue purchasing platinum jewellery in the current low-price environment. The heavy buying by Chinese consumers in the first half of 2009 will more than compensate for weaknesses in the North American and European jewellery markets.
• A new ETF in America
  To date, ETFs, which are big buyers of physical metal, have been a solely European phenomenon. The formation of a US-based platinum and palladium ETF will significantly boost demand.

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