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Risks Facing Platinum Bookmakers

25 february 2014

In 2013, the platinum-group metals looked better than other metals to say nothing of gold that declined almost by 30 percent. In 2014, experts and market players considered platinum as a ‘safe haven’, and they called palladium a ‘choice of bookmakers’ among all precious metals. However, as January showed, the optimism about the platinum-group metals was a little bit premature. The fundamentals for platinum-group metals price growth were formed several years ago, but their effect is constantly mitigated by the factors that are negative for these metals. Early this year, a key factor was the quantitative easing in the U.S. that backed up the U.S. dollar, which brought pressure on gold and platinum-group metals. As a result, prices for platinum-group metals are still more dependent upon the news in the U.S. monetary policy than upon the concerns about supplies from South Africa.

The supplies from South Africa accounting for 80 percent of the global platinum-group metals production are under threat after the mining operations of Anglo American Platinum, Lonmin and Implats were shut down at the end of January due to the strike. The Association of Mineworkers and Construction Union demanded to double the miners’ wages while the employers agree to a 7-percent indexation only. The producers think these demands would destroy their businesses as the most of the SA platinum mines are not cost-efficient with the current prices and cost levels. Amplats is losing 4,000 ounces platinum at its Rustenburg, Union and Amandelbult. The losses of Lonmin and Implats are expected to be about 3,100 ounces and 2,800 ounces, respectively. For these companies the strike is causing losses to the tune of about $17.9 mln per day.

Nevertheless, by the second week in February the spot price for the precious metal not only rose compared to that earlier this year but even slightly increased by 1 percent up to $1,385 per ounce. At the same time, the average platinum price grew up for the period from the beginning of this year to $1,422 which is 4.5 percent higher than in December, and the palladium price was 2.2 percent higher ($717.4 per ounce).

In January, the London Bullion Market Association (LBMA) summarized the results of the analysts’ and traders’ survey about the precious metals prospects, and it showed the platinum-group metals to end the year ‘in the black’ compared to 2013 and early 2014.

The LBMA consensus of opinions suggests the average platinum price to be around $1,490 in 2014, which is a little bit higher than in 2013. Platinum will be traded in the range of $1,300 through $1,650 per ounce according to the experts involved in the survey. The platinum price can be backed up by the threat of the supply failures due to the strikes at the South Africa’s mines and growing demand from the manufacturers of solar batteries and car catalysts.

In 2014, the average palladium price will be around $774.81, which is 6.8 percent higher than in 2013. Palladium will be traded in the range of $659.96 through $863.21 per ounce. According to LBMA, the precious metals will be backed up by short supplies from the mines and suspended sales of the precious metal from the state fund.

The comments of the analysts and traders asked by the LBMA are of interest in terms of evaluation of the importance of various factors effecting the platinum-group metals prices in 2014. Not all the experts made the same forecasts for the platinum-group metals shortages on the market, the influence of the reserves accumulated and the secondary production volumes. The contradictory signals coming from the Russian Gokhran (State Depository for Precious Metals) that quite recently has been a major player added to the confusion. When the market believed at last and felt the decline in exports from the Russian reserves (in 2012, the Gokhran decreased the sales by over 3 times year on year down to 7.75 tonnes), the new Gokhran director told about the need to keep the reserves and even did not exclude the possibility of increasing the reserves. Below, there are the opinions of the experts expressing their different points of view on the platinum-group metals prospects in 2014.

Sonia Hellwig of Heraeus points out that the supplies from South Africa still remain a dominating factor for the platinum market. The situation in South Africa has somewhat improved since the strike boom in 2012, so this factor will hardly have a steady effect on the price. The second factor is a demand from the industry. 2013 was not the best year for car sales in Europe, but a buoyancy is expected in this sector in 2014, as well as in the industry on the whole. The demand for platinum will benefit from the more rigid environmental requirements to cars. Finally, the investment demand supports the successful launch of the SA platinum ETF by the Absa Bank, which has created an additional demand for over 900,000 ounces. If this trend continues, the platinum price will gain support in 2014. Heraeus estimates the shortage of palladium in the market as 740,000 to 850,000 ounces. The absence of supplies from the Russian state reserves will take its toll – as per the estimates of GMK Norilsky Nickel, the largest palladium producer, there will be no supply in 2014. However, the secondary metal production could partially compensate for this factor. The investment demand for palladium is weak as opposed to that for platinum, although the situation can change after the launch of the South Africa’s palladium ETF. The demand from the most important markets of America and Asia will be steady. 

Ross Norman of Sharps Pixleyevaluates evaluates the platinum shortage as 500,000 ounces in 2014; such deficiency will have a positive effect in the mid-term. The demand for platinum in the car catalyst sector could be over 3.2 mln ounces, and the strikes in South Africa are still among the major risks for the stable supplies. According to him, palladium should become a ‘choice for bookmakers’ in 2014 and the reasons are the same – the strikes in South Africa, depletion of the Russian reserves, growing demand for cars in Asia. However, like in the case with platinum, palladium will be replaced in many industries, including the electronics production, which will affect the investors’ willingness to buy shares in the palladium ETFs.    

Tom Kendall at Credit Suisse thinks that the platinum shortage on the market is overestimated. Platinum has a long way to the demand and price recovery, and the SA platinum mining industry needs to undergo a more profound restructuring but this process is vigorously opposed by political considerations.

Bart Melek of TD Securities (Toronto) is of opinion that the current platinum price of $1,400 gives no incentives for the industry to build up inventories, sufficient for maintaining the equilibrium on the market in future. The improved demand for car catalysts in Europe, steady demand in China and possible irregular supplies, most probably, would create a significant platinum shortage within next few years. The production growth in South Africa suspended due to the strikes, lower ore grade and the power generation problems, while in other mining regions there is a flat market for nickel - and the platinum-group metals are the nickel by-products. The expert also notes the factor of great interest shown by the ETFs.

Eddie Nagao at Sumitomo Corporation believes that on the threshold of the elections in South Africa, there will be an upswing of the trade unions’ activity and the situation with the supply will become critical, but the demand will be satisfied thanks to the existing stocks. The key for the forecast is the demand growth in the Asian jewellery sector. The palladium price will be backed by the expected decline in the supplies from South Africa and the higher investment demand from the ETFs. This will contribute to further decreasing the price gap with the platinum - but not to a significant extent - as the use of palladium in industry is going down.

Despite the fact that the fundamentals for palladium are positive, the investors’ expectations will not necessarily bring to the real decrease in the supply, because it could be influenced by the stocks accumulated earlier and the secondary metal, says Jonathan Butler of Mitsubishi Corporation International.

Peter Fertig at the Quantitative Commodity Research (QCR) considers that apart from the shortage factor, the falling gold price affects the palladium price, although in 2014 palladium will look more stable than gold and silver.

 Rene Hochreiter of Allan Hochreiter Ltd (Johannesburg) thinks that the shortage on the platinum market could be propelled by anticipated deals: Anglo American selling its share to Anglo Platinum, and Glencore to Lonmin. New owners could expedite shutting down of non-performing mines, which will aggravate the deficiency in the coming years. Talking of palladium, he draws our attention to the statement of the director of Gokhran about the intention to keep the precious metals inventories. Hence, the negative impact of the sales from the Russian state reserves on the prices could continue in 2014, too.

David Jollie of Mitsui & Co Precious Metals Inc. notes that the shutting-down of mines in South Africa and purchase of 900,000 ounces by the platinum ETF were not sufficient for the prevention of the platinum dollar price drop in 2013. He does not expect the purchases by investors to remain at the same level this year, so the resulting potential deficiency on the market will not be significant in 2014. The slowing demand in China also is a matter of concern. The price will rise, but it will be moderate and the average price will reach $1,485 per ounce. The secondary metal quantities will compensate for some decrease in the palladium supply to the market. In the long-term, the palladium price could grow up to $1,000 per ounce. At the same time, even a 10 percent growth in the car sales in China and North America results in the additional demand for 200,000 ounces of palladium – it is not a substantial figure compared to the global market volume (Johnson Matthey, the largest world platinum-group metals distributor, estimates the supply in 2013 as 200 tonnes).

According to Philip Newman of Metals Focus, palladium positive fundamentals are partially present in the price – platinum-group metals were well ahead of other metals in 2013. The strikes in South Africa and the launch of the palladium ETF will certainly exert influence, but the growth in 2014 will be gradual. The decision of the Gokhran to return to the practice of palladium purchasing raises concerns.

Rhona O'Connell at Thomson Reuters GFMS is prudent when evaluating the recovery prospects of the production levels after the strikes are over and makes prognoses that the restrictions in the power infrastructure and the debates about the wages will remain the crucial issues on the platinum market. The steady price growth will start late in 2014, and it will be triggered by – among other reasons – more rigid requirements to the car exhausts and the higher demand in the jewellery sector. By and large, the fundamentals for platinum will be more positive in 2015 than now. Palladium is the customers’ number one pick, and Thomson Reuters GFMS expects the price to reach $900 in the beginning of Q2 on the background of factors common for platinum-group metals and the anticipated launch of a new palladium ETF. However, the seasonal decline in the demand in the jewellery sector in Q2 will also affect the palladium that will fall down to the lowest annual level. In the second half of the year, however, palladium will recover due to the steady demand in the car industry and reach up to $1,000 per ounce. The palladium stocks accumulated are ‘in the firm hand’, it means, they will not impair the precious metal price.

Rohit Savant of CPM Group thinks, the palladium price could be fuelled by the possible boost in the European car industry in 2014, but if the European car sector does not have an uphear picture, this will also have an impact on the prices. The persistent failures in the supply from South Africa have also backed up the price. Nevertheless, significant reserves can weaken the price growth potential. Q1 and Q4 will become the periods of the maximum strengthening of the palladium prices. As expected, the ongoing improvement in the US and Chinese car industries and the positive signs in the European car sector will contribute to the growth of the industrial demand for palladium. The higher price levels will be backed by the problems in the supplies from South Africa and the launch of the palladium ETF.

Igor Leikin for Rough&Polished