Market review

After the storm

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

 
The end of the ride Plunging auto sales send platinum plummeting 68%

2008 — the year the bubble burst

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 2/3 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.

Investors cash in too good an opportunity to miss

The low price was good news for investors

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.

South African supply disappoints

Production shortfalls stabilise supply and demand

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.

Outlook positive as global economy recovers

Global light duty vehicle sales


Exhaust pollution has been cut drastically in the world’s mature markets

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 and 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 buying of 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.

Platinum

(000 toz)20052006200720082009*
Demand
Automotive3 5704 0404 0803 7503 010
Jewellery1 9651 6651 5451 3551 875
Industrial1 7201 8301 8701 7801 570
Investment10(30)150400330
Total Demand7 2657 5057 6457 285 6 785
Supply
South Africa5 0305 4355 1454 4654 560
Russian sales850800800800775
Other6156356401 075720
Recycle775855925970850
Total Supply7 2707 7257 5107 310 6 905
Balance5220(135)25120

Palladium

(000 toz)20052006200720082009*
Demand
Automotive4 6054 8005 0254 7604 450
Jewellery1 4301 000750875950
Industrial2 4752 3302 3552 4202 000
Investment20050250425400
Total Demand8 7108 1808 3808 4807 800
Supply
South Africa2 5752 7602 6702 3552 450
Russian sales4 1004 5004 2503 7502 700
Other1 5951 3151 2651 180995
Recycle6507809301 0851 060
Total Supply8 9209 3559 1158 3707 205
Balance2101 175735(110)(595)

Rhodium

(000 toz)20052006200720082009*
Demand
Automotive719825844761663
Industrial140144146134133
Total Demand859969990895796
Supply
South Africa645648663582595
Russian sales7070656565
Other3638383742
Recycle162184206222190
Total Supply913940972906892
Balance54(29)(18)1196

* Estimates

Implats Annual Report 2009