Platinum’s rare nature gives it additional value and appeal

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Platinum looks to the hydrogen future - 1

03 august 2020

(Part one)

The platinum investment portfolio lacks a strong technology push like the one experienced by palladium in 2015 due to ‘Dieselgate’. The scandal that revealed that gasoline engines were more environmentally friendly than diesel ones*, undermined the platinum's position in the automotive industry and laid the basis for a palladium rally. As a result, the palladium prices exceeded the price of platinum in mid-2017, and the gap has widened since then. Platinum is now at the last year’s level, which may be not so bad for most commodities given the current crisis this year but worse than gold (+24%), palladium (+24%), and rhodium (+29%).

The correction caused by the pandemic made retail investors be more active this year and sweep away platinum bullion bars and coins in March-April, but the fundamentally low price is rather a negative factor undermining the psychological confidence in this precious metal. Unlike palladium, platinum is widely used in the jewellery industry, and in addition to trends existing in the automotive industry, the price is under pressure because of the slowdown in luxury purchases in China - first, due to the threat of a trade war with the United States, and due to the pandemic this year. At the same time, the supply is low sensitive to low prices as the South African producers refrain from a serious shutdown of operations because high prices for palladium and rhodium provide them with an acceptable level of the total metal basket.

Does platinum still have the game in hands? The answer ‘yes’ came not from the jewellery industry that remained unchanged for decades, but from the rapidly developing automotive industry where the coronavirus has basically intensified the trend towards green production. While platinum is gradually losing ground in traditional vehicles, and the platinum group metals (PGM) are not required in electric ones at all, it bids for global leadership in an alternative type such as hydrogen-powered vehicles. These vehicles' fuel cell catalysts - mainly trucks and buses - require twice as much platinum as diesel vehicle catalysts. The use of platinum in the fuel cells of hydrogen-powered cars and vehicles can provide the precious metal with the same technological breakthrough that will return the former appeal to metal.     


The COVID-19 pandemic has had a major negative impact on the platinum market, hit the prices and demand but the Q1 2020 results showed that the net effect was less than originally expected, which provides a more encouraging outlook for the whole year, according to the World Platinum Investment Council (WPIC). Non-pandemic smelting failures in South Africa and the resulting shutdowns have significantly reduced metal supply to the market. As a result, supplies in January-March fell by 19% compared to the previous quarter (down to 1.77 mn oz), while the demand fell by 5% (down to 1.65 mn oz), and at the end of the quarter, there was a slight surplus of 124,000 oz in the market. Therefore, the WPIC annual forecast for the market has declined slightly compared to the pre-crisis one - the surplus will amount to 247,000 oz compared to the previously expected 119,000 oz.

SFA Oxford evaluates the platinum market balance more pessimistically based on a significant excess of supply over demand and expecting a 1.3 mn oz surplus excluding investment purchases. Such a significant bias will provoke a price correction to $680 per ounce (15% below the current price).

In contrast, the Bank of America’s analysts believe the platinum market will be undersupplied in 2020, as a lockdown in South Africa and a recovery in the automobile manufacture in China will offset the drop in demand in the automotive and jewellery industries due to the pandemic.

According to the BofA estimates, the platinum market is facing a deficit of more than 300,000 oz, with the demand falling by 15.6% and supply decreasing by 17%. Based on this, the Bank of America's forecast assumes that the average price of platinum in 2020 will remain approximately at the last year’s level ($865 per ounce).

Nornickel, the largest palladium producer, expects a balance in the palladium market and a 500,000 oz platinum surplus in 2020 (excluding investment demand).


The WPIC estimates that platinum supplies in 2020 will decline by 13% to 7.2 mn oz, below the 5-year average, including the fall in primary production by 13%, or 810,000 oz, and the decrease in recycling by 12%, or 255,000 oz. The production in South Africa will show a 17% drop to 3.65 mn oz, while other top producers (Zimbabwe, North America and Russia) will cut their output by 1-5 percent. The reduction is due not only to the national lockdowns from late March to early June due to the pandemic, but also to force majeure at the facilities of Amplats, the largest platinum producer in South Africa, that produces 78% of world platinum and 36% of palladium.

At the end of February, the main unit of the Anglo American Platinum's converter plant (ACP, Rustenburg, South Africa) was damaged by an explosion and shut down, the company announced force majeure and lowered its forecast by 500,000 oz of platinum and 300,000 oz of palladium (down to 3.1-3.6 mn oz of the PGM). The closure of the ACP, a key facility in the concentrate processing, has led to the accumulation of work-in-progress stocks owned by both Amplats and third parties, including Zimbabwe. Initially, it looked like it would take up to two years to process them, but the COVID-19-induced closure of the mines will allow Amplats to process them before the end of the year.

According to BofA, the South Africa's lockdown has had a profound impact on the mining industry. The South African Minerals Council expects that it will take time to recover production and supply chains to the pre-pandemic levels. So far, underground mines employ only 50% of the regular number of miners. Another manufacturer, Implats, expects the South African facilities to be utilized at 30-40% in May-June compared to their guidance figures. The Sibanye-Stillwater and RBPlat companies have withdrawn their production forecasts. BofA believes that the national production in May and June will not exceed half of the usual level.

Meanwhile, Renaissance Capital estimates that capacity cuts are not enough to compensate for collapsed demand. Due to the lockdown in South Africa, the supplies of PGM will decrease by 10% in 2020, the investment bank said, while net demand will collapse by 28%. The main factor behind this will be a 30% decline in consumption in the automotive industry due to the transition to a saving strategy. As a result, a surplus will be generated not only in the platinum market, but also in the palladium and rhodium ones. “While the nationwide lockdown in South Africa presented a supply response through forced capacity closures, we believe the deteriorating demand fundamentals could tip the platinum group metals (PGMs) into surplus territory with a near-term recovery unlikely. As a result, we do not believe the elevated PGM price environment is sustainable,” says the investment bank's review.

Nornickel also states that the decline in production in South Africa is so far inadequate to the decline in the platinum prices, as the prices of palladium and rhodium that have dropped much less keep the value of the aggregate basket of the PGM well above the costs. This year, Nornickel will reduce the production of the PGM by 7.5% to 2.7 mn oz, which is connected with a planned reduction in reserves of the raw materials rich in these precious metals, and not with a pandemic that did not seriously affect either the production process or shipments of the metal to their customers.

But the impact of the pandemic on the manufacturing process in South Africa will continue even after the virus fades away. South Africa has introduced new rules for mining adopted during the pandemic, Johnson Matthey said. These norms, in addition to the requirements for the outfit and disinfection measures, oblige the miners to stay at a distance of 1-2 metres from each other. Given the narrow underground mines, the production figures will be lower. According to Johnson Matthey, this will be one of the reasons for the PGM production decline by at least 20% in South Africa this year.

Nornickel points to the same possibility “However, South African supply might ramp up slower than expected with social distancing potentially disrupting the operation more than currently expected, possibly resulting in lower surpluses.”


Measures to prevent the spread of COVID-19 have had a significant impact on the transportation of the PGM, which is usually carried out by air. In March and April, a sharp decline in the number of flights, even cargo ones, led to disruptions in the precious metals’ supply chain from South Africa to the northern hemisphere, as well as from the trade hubs such as London and Zurich to Asia, Johnson Matthey said. As a result, in March-early April, the Asian countries recovering from the first wave of COVID-19 faced a PGM shortage, as the supplies from South Africa, North America and Europe were paralyzed. This helped to support the prices of palladium and rhodium, but the price of platinum was less affected despite the shortage of this metal in bullions that were actively bought by Japanese and Chinese investors, industrialists and jewellers.

Logistics disruptions have also affected the production of recycled platinum, which normally satisfy approximately 25% of the global demand for this metal. The key sources of recycled platinum are the used exhaust gas converters and jewellery scrap. The sharp decline in the collection of the autocatalyst scrap as the car owners refrain from buying new cars has become another factor in reducing the recycled platinum production. There is a surplus of used cars in the secondary market, which their owners will try to sell to a car sharing sector to avoid bankruptcy. The increased demand for secondary cars is fraught with a reduction in palladium and platinum recycling from spent catalysts, said Nornickel. The company expects recycling of the PGM to fall by 5 to 15% this year compared to 2019, depending on the rates of possible cash-for-clunkers programmes.

The WPIC predicts a 7% drop in recycling this year to 1.51 mn oz. The factor of trade-in delays due to the crisis will be partially offset by processing the accumulated scrap stocks, and in 2021, the processing will return to usual levels. Johnson Matthey believes that in general, the economic reason for being active in this segment is explained by high PGM prices, although they also prevent dealers and scrap collectors from freely funding the purchases.


As for palladium, the key for platinum is the demand from the automotive industry - according to Metal Focus, it accounted for 34% of the total consumption in 2019. More than 80% of the metal consumed in the automotive industry is used for the production of exhaust gas neutralizers for diesel cars. Other industries consume 26% of platinum; first of all, the precious metal is in demand in the chemical industry, electronics, glass fibre and optical glass production. The jewellery industry uses 25% of the global platinum supply, while the investment demand accounts for 15%. The form of investments in the physical metal ranges from coins and weighted bullion bars to investments in physical platinum in the exchange-traded funds (ETFs) that have accumulated substantial stocks of standard bullions.

The WPIC expects global platinum demand to fall by 18% this year to 6.95 mn oz reflecting the decline in the car and jewellery sales and weak investment demand. The decline in demand in the jewellery industry will be 15%, in other industries 5%, the investment demand will fall by 52%.

The jewellery industry is set to decline this year as it adapts its business model to the store closures and more cautious consumer behavior, the WPIC writes. In particular, the demand for jewellery will fall by 20% in China this year, in India by 17%, to the lowest level since 2016. The slowdown in the economy and the decrease in disposable income will continue to have a detrimental effect on the consumer spending on jewellery pieces that are discretionary goods and will be the last to recover even after full retail reopening. The studies show that the shoppers tend to postpone expensive and non-essential purchases until at least August-September. Despite the fact that the leading jewellery brands had very small inventories at the end of 2019 for fear of an escalation of the US-China trade war, it will take long to recover the purchases to replenish their inventories.

The consumer demand for platinum in China in January-April was exceptionally weak due to retail closures, low activity after reopening the stores in February-March, and reluctance to spend on luxury, Johnson Matthey says. The consequences will be felt for a long time, as the low rates of the economic growth and weak demand for jewellery will lead to bankruptcies of a number of players whose stocks will enter the market and reduce the need to purchase new metal.

As for the positive trends for platinum, one should pay attention to the emerging shift of consumers from white gold to platinum as this metal is still much cheaper than gold. There are also hopes for a demand to become normal in Q4, particularly in India, as the holidays and wedding season approach.

The bright spot for platinum is the bullion and coin segment (part of the investment demand) and it will be the only one to see growth in 2020. According to the WPIC estimates, the demand in this segment will grow by 115% (by 324,000 oz) due to the investors’ interest in the traditional assets amid the growing global risks. In March, platinum bars and coins were sold at their fastest rate in 5 years. The retail investors’ interest spurred the release of new platinum coins in South Africa. In Q1, the demand for bullions and coins increased by four times driven mainly by Japan where investors purchased almost 200,000 oz of platinum bullions in March, and by China where the sales of bullions at the Shanghai Stock Exchange reached a record of 340,000 oz. In addition to private investors, the industrial consumers and jewellers stepped up their purchases taking advantage of the platinum price correction in March. Due to the sharp surge in demand, there was even a bullion shortage in the traditional European hubs, which contributed to an increase in leasing rates by more than 10% in late March and April.

Trevor Raymond, Research Director at the WPIC, says that the low price of platinum in March provided a buying opportunity, but fears of the global risk and huge negative financial impact of the COVID-19 pandemic are likely to continue putting pressure on the demand for precious metals, including platinum.

At the moment, the price correction had a positive effect on demand, but in the long term, it is rather a negative factor. “Psychologically, the consumer confidence in platinum was shattered when the platinum price dropped below gold for the first time in decades and stayed there,” Nornickel notes in its review. 

In contrast to purchases by private investors, the total investment demand from ETFs is estimated at zero level in 2020, as net sales in platinum ETFs in Q1 2020 will be offset by a similar increase in the ETF inventories in the rest of the year. The WPIC believes that the market volatility is likely to make investors to be more cautious. This will repeat the situation of the previous several years when the demand from retail customers was offset by a drop in the investments in the platinum ETFs.

* in gasoline engines, palladium is used, in diesel ones - platinum.

Igor Leikin for Rough&Polished