Platinum to crest a new record high this year?: GFMS

GFMS reckons that Platinum demand is nowhere near as flexible as it was; palladium demand to continue to improve

LONDON - 

The 2008 Platinum and Palladium survey from GFMS Ltd released last week shows that the group remains positive towards both metals for 2008 and does not expect platinum prices to fall below $1,700 over the remainder of this year. The risk in the platinum price lies to the upside, with every possibility of moving to a new high of $2,400 before year-end. The palladium price is forecast to trade between $400 and $550, with a promising outlook for demand in both autocatalysts and jewellery. Furthermore, although above-ground stocks are large, GFMS believes that there is a growing appreciation of palladium's underlying fundamentals.

GFMS notes that with supply and demand tightly balanced, any supply disruptions will have noticeable consequences for the platinum market "let alone those [already] witnessed in 2007 and 2008". The South African mining industry had been set to deliver further growth in 2007, but continuing mine-site fatalities and a prevailing shortage of skilled personnel have combined to derail these plans and South African mine production contracted by almost 7% last year. With another contraction in production from Russia and a fall in nickel by-product output in Canada plus shortfalls at Stillwater, overall mine production in 2007 was down by more than 400,000 ounces.

Platinum production in 2008 is expected to register a further moderate decline with power-related losses in South Africa (along with other complications such as the flooding at Amandelbult, difficulties at the Polokwane smelter and contractor issues at Everest that occurred earlier this year) more than offsetting higher production from development projects.

Platinum demand, meanwhile, is less responsive to price than hitherto as a result of the reduction in the importance of the jewellery sector. In 2007, jewellery comprised just 19% of world platinum demand, compared with 45% in 1999. In absolute terms, jewellery demand has contracted by 1.3 million ounces over the period, an average annul fall of almost 8%, while the fall last year was 13%, despite a modest gain in China. The autocatalysts sector turned in a good performance, although the rate of growth has slowed as result of ongoing attrition in gasoline systems now accompanied by partial substitution by palladium in the diesel sub-sector.

Total platinum demand has been steady now for the past five years and GFMS suggests that, given the explosion in platinum prices, it seems probable that this year will be the tipping point where fabrication finally suffers a material decline. This should relieve the pressure on limited above-ground stocks, which are already challenged by the allocated nature of investment in Exchange Traded Funds.

Increased scrap return from the jewellery sector along with palladium's intrusion into platinum's former stranglehold on the diesel sector will help to mitigate this year's shortfall and may even take the market into a surplus. This however excludes the impact of Exchange Traded Funds, which may well have growing implications for lease rates and may eventually develop into a self-fulfilling prophesy, especially if they come to be regarded as part of platinum's underlying fundamentals.

The palladium market is expected to experience further gains in demand. As alluded to above there is scope for considerable advancement in the diesel sector that will help to bolster growth in autocatalyst usage, while palladium jewellery has consolidated its position in China and has opportunities for improvement both there and in the United States. In the longer term, palladium jewellery will benefit from the recent programme announced by Norilsk Nickel and other producers (including Anglo Platinum. Impala Platinum and Lonmin, plus Stillwater Mining Company) to establish a clear and specific brand position for palladium in jewellery.

Global palladium demand increased almost 5% last year, driven largely by the autocatalysts sector, in which demand grew by more than 8%. Other increases were recorded in the jewellery, electronics and dental sectors, with small decreases elsewhere. With mine production also contracting slightly following falls in Russia, South Africa and North America, the palladium market registered a small deficit and as a result global inventories were reduced. Once changes in ownership of inventories are taken into account, however, including sales from Russian stocks into the open market (and netting off absorption by Exchange Traded Funds) then the market again experienced an increase in available stocks during the year. Sales from Russia in 2007 were substantially lower than in 2006. There were sizable deliveries into Switzerland towards the end of 2007 and it looks as if sales of this metal were deferred into 2008. Whether this will be the totality of Russian state sales this year remains to be seen, and will largely be a function of the extent and timing of further arrivals into Switzerland, especially during the final quarter.

Palladium demand is likely to increase again this year, and these advances are unlikely to be overtaken by any unexpected rise in supply, as mine production and recycling levels are reasonably well telegraphed. GFMS is looking for a gross deficit again this year, which will absorb part of the inventory sales from Russia. Exchange Traded Funds will absorb a good part of the balance. Unlike platinum, the group does not expect any significant liquidity pressures for palladium in 2008.

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