CPM Group has recently published its annual review of the platinum group metals markets and concludes that in 2008 the balance between newly refined platinum supplies and fabrication demand is likely to show a reduced surplus of 32,000 ounces this year, down from 358,000 ounces in 2007 and 777,000 ounces in 2006. When coin fabrication is taken into account then this drops to 12,000 ounces, down from 338,000 ounces and 754,000 ounces in 2007 and 2006 respectively.

This, as the group puts it, leaves no new metal for investors [which by definition would include coin purchases], although the survey goes on to assert that Investors are not passive agents in these markets, however, sopping up what fabricators leave for them. Investors have already added another 202,126 ounces to their ETF platinum holdings in the first four months of this year, along with a couple of thousand ounces in platinum coins and an unknown quantity of physical platinum purchased in Over the Counter market and this has been a key factor driving prices to their recent high; these trends should be expected to continue over the course of 2008.

Because these investors tend to be assertive market participants, when they do enter the market they tend to be forceful buyers and prices should therefore be expected to rise much more sharply than they have in recent years, along the lines of the spike in prices seen during the first quarter of 2008.

On the supply side, CPM is one of the more sanguine market observers with respect to the impact of power supply problems in South Africa on domestic platinum production this year. The group is looking for a potential decline of 3.3%, or 168,000 ounces over the year as a whole, due largely to the problems in the power industry, noting that while some observers are looking for falls of up to 10-12%, the miners themselves have stated that they expected to recoup most of the first-quarter losses over the remainder of the year. This is clearly a matter of some debate within the industry - only time will tell. This assertion implicitly assumes that there will be no further power shocks this year, which is the obvious base case to take and CPM points out that another power hiatus could be as damaging towards production as were the January 2008 cutbacks.

CPM's report went to press before the Eskom tariff hike was agreed, and the report noted that there was significant public opposition to the proposed 53% hike. As it turned out the increase of 13.3%, added to the 14.2% increase gave an average rise for the year of 27.5% - although the poorer consumers will not incur the second rise, while non-municipal clients are expected to have to absorb another 20% on top of the numbers already agreed.

While power supply is running at more or less 95% of capacity, the miners have been trying to improve their efficiencies and to turn their operations at close to 100% of the rate at which they were operating when power supplies were at full capacity. Some companies, however, are still reporting that power supplies have not been consistent, and some companies have and are working to setup their own power generation units.

On a broader scale within the supply side, CPM points out that of the estimated $10 billion that were allocated in 2007 for exploration expenditures (this figure from Metals Economic Group), just 3% or $299.7 million went towards platinum exploration. The global increase in exploration and mining activity across metals has led to a scarcity of qualified personnel [and equipment] in all areas of the mining industry; this is already affecting existing mining operations and the position is expected to worsen in future. The problem with equipment is hampering exploration and development projects, while costs have increased. The group suggests that mining projects across the board will be under considerable stress over the next several years as a result of intense competition for the necessary infrastructure - be it human or inanimate.

Refined supplies of platinum to the market are projected to fall by 1.4% this year or 109,000 ounces to 7.32 million ounces, with the bulk of the decline coming from South Africa, along with a small decline from Russia. North American output is expected to rise (with this increase to accelerate in 2009 as a result of increased by-product supply for new base metal operations). Secondary supply accounted fro 920,000 ounces last year, a 7% increase over 2006, while this year this component could rise by over 8% to a million ounces.

Fabrication demand, by contrast, continues to rise with the global auto production and sales running strong in 2008, which leads to increased usage in emission control catalysts, as well as demand in petroleum refining catalysts. Despite further forecast shrinkage in jewellery demand (albeit a small fall); fabrication demand is expected to grow by 3.2% this year to 7.29 million ounces. The strongest growth is likely to come from chemical and petroleum refining catalysts, which are expected to score a 9.8% increase this year, while emission control catalysts are expected to absorb 4% more platinum than they did last year. Jewellery use is expected to fall by almost 6%.

The survey iterates the fact that platinum end-users have been seeking substitutes for several years by virtue of platinum's cost and that fabricators have been looking to minimise its use because it is an expensive metal to work with. It is thought possible that the current rise in prices may pressure some of the more price-sensitive consumers out of the market, but the bulk of platinum demand is relatively price-inelastic, especially given that catalysts, which take up approximately 65% of platinum usage have only limited scope for substitution.

While platinum demand is at risk in several of its uses, none of the potential threats are likely to have any material impact on platinum demand, at least over the short to medium term.

This backdrop sets the scene for the activity in the investment market. CPM suggests that while the supportive underlying fundamentals have definitely contributed to the upward pressures on prices, it may be investor buying that has had the greatest effect. Investor attitudes towards platinum have been changing since 2005 and this has made the market relatively more liquid; consequently there is increased investor interest in holding the metals, as well as the fact that commodities as a whole have been receiving increased attention from the investor community. The group estimates that investors, largely institutions, have spent more than $2.2 billion in the platinum bullion market over the past four years.