LPPM WEEK – When will platinum react to its fundamentals?

May 18, 2015 - 9:35 AM GMT

Platinum, trading just shy of six-year lows and out of favour with investors, continues to defy logic given a fundamental supply deficit.

Many delegates at this week’s London Platinum and Palladium Week here will therefore hope there are better times on the horizon.

One hot topic is likely to be when the shortfall might finally be reflected in the price or if above-ground stocks will continue to cap any gains.

And for producers, labour disputes and inadequate energy supplies in a market already dealing with rising costs and falling demand will again be at the forefront.

“There are a number of pivotal themes likely to dominate discussions during Platinum Week, from the anti-diesel movement, fuel cell vehicles and supply restructuring to the level of above-ground stocks,” Barclays Capital said.

The main discussion will be on how producers will tackle mines that are not viable at current price levels and whether or not they have plans to reduce supply to try to get some traction going in the market.

Regardless, while a weaker rand has supported some producers’ margins, further depreciation in the dollar may well squeeze out some producers and prompt the closure of some higher-cost shafts.

Despite operations beginning to normalise following last year’s industrial action in South Africa, the platinum market is expected to run a deficit of 21 tonnes in 2015, according to Thomson Reuters GFMS, lower than the 32-tonne shortfall in 2014.

Prices are now down 50 percent since the all-time peaks hit in 2008 at $2,300 per ounce. The metal recently struck its lowest since the post-peak crash during 2008/2009 at $1,080.

Even during the heights of last year’s costly five-month strike that skewed annual production figures, platinum peaked at just $1,520 per ounce – it had started the year at $1,371 and closed it 12 percent lower at $1,206.

But there is also concern on the investment side. Identifiable investment in platinum, which is the sum of retail investment and net change to exchange-traded funds, fell 66 percent to 356,000 ounces in 2014 from 2013, according to GFMS. ETF demand alone fell 76 percent, it added.

“Although platinum’s fundamentals are sound and if anything bullish given a global auto industry that is performing better than expected, it is investor interest and jewellery demand that is weighing on prices,” FastMarkets analyst William Adams said.

Still, automobile sales in the eurozone are not enough prop up the platinum market, Société Générale’s Robin Bhar said.

“Despite improvements, it is difficult to get too excited about the European car sales market at the moment,” he said. “Unless European car sales start motoring, I don’t see any reason platinum will take off.”

“History tells us that supply concerns will support a floor on prices but ultimately you need demand to really drag the place up,” he added.

European car sales climbed 5.7 percent in 2014 and the recovering economy is likely to bolster consumer confidence, potentially raising spending on luxury items such as cars – a bullish factor for platinum. But European car sales are not as exciting compared with the much larger numbers in China and America, where petrol-driven cars are much more popular.

So there is a strong case for platinum to fall as low as $1,000 per ounce because of a lack of investment interest although the industrial sector, which accounts for 40 percent of annual demand, could come to its rescue.

This may well be a hot topic of the week – if industrial demand does command more supply, is there a bullish case for platinum either late this year or in 2016?

Industrial demand was flabby in 2014 because of soft Chinese demand but the WPIC expects usage to grow by some nine percent to 1.695 million ounces in 2015.

“Slower growth in China and the government’s clampdown on graft has hit demand for luxury items, such as jewellery, while booming equity markets have diverted investors’ attention away from precious metals. But if equities start to correct, which seems likely before too long, platinum may well be seen as a good investment,” FastMarkets’ Adams added.

The story in palladium is slightly different – the market recorded its deepest deficit for more than a decade in 2014 at 1.58 million ounces, according to GFMS, with prices peaking at $911.50 in September.

While price action has been limited so far in 2015, investor sentiment is slightly more robust than it is in platinum. At $781 per ounce, the metal is almost unchanged from its 2015 open of $796 – but rising car sales in the US and higher metal loadings in autocatalysts paint a brighter picture.

“Both markets are set to deliver a deficit in 2015… palladium’s outlook is relatively more constructive,” BarCap said.

(Editing by Mark Shaw)