Platinum glitters on supply disruptions

Platinum (which leads the Platinum Group Metals) exhibits the qualities of both industrial and precious metals. Following a weaker-than-expected price performance in 2013 which largely came from the weakness in gold spreading across the complex, the start of 2014 has witnessed a noticeable uptick in platinum prices. Rates have risen alongside the rest of the complex in the first three weeks of this year.

Interestingly, platinum’s premium over gold has now increased to about $200 an ounce with prospect of further increase in the coming months.

The world platinum market is expected to be in deficit this year, albeit a smaller one than in the previous year. The table alongside shows how overly dependent the world market is on South Africa for supplies which, in turn, means a huge supply risk on account of adverse developments, if any, at the origin.

To be sure, from the beginning of last year, strikes have continued to pose problems for South African producers. Persistent labour unrest is making it increasingly difficult to secure financing from investors, complain producers. Worse, rising labour costs have combined with rising electricity prices because of strained power supply.

These continue to weigh on production costs. The saving grace has been the currency. A weaker rand (contrary to expectation) has helped neutralise higher production costs and kept export prices competitive.

After the slowdown in 2013, car demand is expected to pick up this year, especially in Europe where the car market has shrunk in recent years.

Europe is the biggest car market for diesel automobiles with more than half of newly sold cars running on diesel. Autocatalysts of diesel powered cars require a higher platinum content. New emission legislations are also expected to drive demand higher. As Europe lifts itself out of economic crisis and fiscal austerity, automobile sales are expected to increase.

As for jewellery, China is a major market. Rising incomes and strong retails sales are expected to spur consumption despite higher prices.

Many of the key themes remain intact for this year but two deserve special mention. First, the wage negotiations at South Africa platinum producers have yet to be fully concluded.

Wildcat strikes are a bane. Coordinated strike action in the mining industry does represent a sizeable upside risk to platinum prices. The second key theme for 2014 is investor demand.

Total platinum-backed ETP holdings increased significantly last year and currently stand in excess of 2.7 million ounces. One can expect a slow build-up in platinum ETP holdings.

So, a combination of investor interest, recovery in auto industry and jewellery demand in China will potentially drive the market higher. Platinum and gold prices have been moving in a tango in recent years; but are set to diverge. Already the price differential is about $200 an ounce with platinum enjoying the premium. The possibility of the differential moving higher to $300/oz cannot be ruled out with potentially rising platinum and falling gold prices.

Analysts surveyed by London Bullion Market Association have forecast the average price for 2014 at $1,490/oz while others are a lot more bullish with forecasts going up to an average of $1,540/oz for the year.

If improved car sales in Europe and supply disruptions from South Africa combine, the price situation can turn explosive.

A potential downside risk to prices would be in the form of global economic slowdown and any deterioration in economic activity in Europe.

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