Ahead of the Platinum week 2013

On Monday May 13, the London platinum week will start and one highlight of this day will be the release of the PGM Market Report by Johnson Matthey. The Platinum report will give an outlook for the supply and demand for platinum and palladium in 2013.  This report is one of the most followed in the PGM market. Another widely followed report is the one published by GFMS, which was presented last week in Johannesburg. GFMS gave some insights into the market outlook for 2013 in an interview published at ThomsonReuters.

Reuters reports that according to GFMS, the platinum market would swing to be over-supplied in 2013 due to falling demand from European car manufacturers. The labor unrest last year in South Africa, which accounts for more than 70% of global platinum mine production, drove the market into a gross deficit of 83,000 ounces last year. For this year, GFMS predicts that supply would increase by 2%.  However, the Reuters report did not state any figures and updated figures were not available at Reuters Eikon.

Johnson Matthey estimated in the November interim report that total platinum mine production would decline in 2012 to 5,840 thousand ounces, down from 6,480 ounces in the preceding year as a consequence of the labor unrest in South Africa. However, also supply from scrap recycling was expected to decline to 1,830 thousand ounces. Thus, Johnson Matthey predicted a supply deficit of 400 thousand ounces. Even if the figures were revised down, it appears as less likely that Johnson Matthey would come up with a supply deficit figure close to the one of GFMS mentioned in the press report

We agree with GFMS that the European automobile sector will be a drag on global demand for platinum used in catalytic converters. However, the plunge of new car registrations in Europe, caused by the recession in many countries following the austerity measures, will also have an impact on scrap supply. If private households and companies buy less new cars then old cars will be driven longer. As a consequence, fewer cars will be available for recycling and therefore, also the supply from scrap platinum should be expected to decrease.

Furthermore, Reuters reported that Anglo American Platinum (Amplat), the number one producer, is expected to reveal the outcome of restructuring talks with the government and unions before the start of the Platinum Week. Amplat plans to cut up to 14,000 jobs and to mothball two mines. Cutting stuff and closing mines will have a lasting impact on mine production. Therefore, we would be surprised if Johnson Matthey were forecasting an increase of supply from mine production and scrap recycling to the level in 2011, which was at 8,525 thousand ounces. We expect only a modest increase of total supply in 2013 compared with 2012.

Investment demand for platinum is likely to remain robust. Holdings of platinum by ETFs have declined in April from the high reached in March. However, according to the figures compiled by Reuters, ETF holdings are still far above the level prevailing at the end of last year.

According to the November Platinum interim report, Johnson Matthey expected that jewelry demand increased from 2,480 to 2,725 thousand ounces. For this year, there might be two opposite forces having an impact on demand. The economic recovery in Asia, despite GDP growth rates remaining below levels seeing some years ago, should be positive for platinum demand. However, platinum is trading again above the price of gold, after trading up to 200$/oz discount about a year ago. The shift from a discount to a premium makes gold more attractive and thus, jewelry demand for gold could increase at the expense of platinum demand.

We pointed out several times that there is a closer correlation between the price of platinum and the development of share prices of some major car companies like Daimler. Those companies are less exposed to the falling demand in southern European countries and still have upside potential. While the supply deficit of platinum might be less in 2013 than Johnson Matthey expected in its November interim report for 2012, we still expect platinum to remain in a deficit and not to swing into a surplus. Therefore, the PGMs will probably perform better than gold or silver in the final months of 2013.