In its latest annual review of the platinum group metals markets, Platinum 2008, Johnson Matthey identifies a series of key trends that will inform the outlook for the metals for the rest of this year.
Platinum is expected to remain in a substantial deficit over the year as a whole, suggesting a strong price performance throughout. The financial background and banking tensions are expected to contribute to extraordinary volatility in the platinum price and upside risks remain, notably from the supply side, which leads the group to look for a trading range of $1,775 to $2,500 during the next six months.
With platinum trading in late May at $2,165, this implies scope for a spike to a high some 15% over existing prices. While this might seem like an awfully wide range it should be seen as reflecting the expectation for extraordinary volatility. Platinum has spiked before and is fully capable of doing so again. The downside is the prospect for fresh liquidation in the commodities sector if necessary in the face of any sustained fall in the equities markets.
On the supply side JM argues that the power supply situation in South Africa has stabilised, with mines receiving a greater amount than hitherto of their normal electricity requirements and that, provided that the electricity supply can be maintained throughout the South African winter and power is available for new and expanding operations, the overall shortfall in South African platinum production is likely to be less than 200,000 ounces. This is, however, a tentative figure given that the mining companies are saying, in the main, that it is not yet possible accurately to quantify likely lost production, the latest weather forecasts are not good, and furthermore it does not include losses such as the flood-related outage at Amandelbult.
Although a number of mining companies are installing electricity generation capacity of their own, this will not be enough fully to offset the Eskom-related constraints, which are likely to remain in place until 2012. Mine production schedules have also had to cope with reef geology and personnel issues that have already affected output. The company suggests, though, that construction of new capacity is continuing. JM estimates world mine production levels for 2007 at 6.55 million ounces (203.7 tonnes) and, while there may be some recovery in 2008, output is unlikely to recover to 2006 levels of 6.83 million ounces or 212 tonnes this year.
The demand side will be affected by significantly higher scrap returns for the jewellery sector, especially in Asia and this will to some extent mitigate the low level of inventories that manufacturers, wholesalers and retailers are carrying. This is particularly the case in Japan, where the very high volume of metal bought in the form of jewellery over the past thirty years is seen as likely to continue to return for reprocessing.
Against a jewellery market of 1.59 million ounces (49.3 tonnes) and a global industrial demand level of 7.75 million ounces, Johnson Matthey estimates that some 200,000 ounces of Japanese platinum jewellery was returned for scrap last year, with most of it being reused in the jewellery trade. This contributed to a fall in net platinum jewellery demand of 2.4% from 1.64 million ounces in 2006 (autocatalyst recovery was 890,000 ounces, so this also makes jewellery scrap return significant, especially given that the market is in a deficit and inventories are low). Japanese purchases of platinum for jewellery fell for the fifth year in succession in 2007, registering 280,000 ounces, a fall of 22% against 2006.
Another interesting and important development is the rising awareness of second-hand jewellery in Japan. Collectors are realising higher margins than hitherto as a result of rising prices of diamonds, gold and platinum and a number of companies are registering for antiques dealer licences in order to enter this market place. Consequently, the company estimates that the volume of recycled platinum employed in Japanese jewellery manufacture is now approaching the amount of new metal being used.
Recycled jewellery is taking an increasing role in the Chinese market also, but the underlying appetite for platinum jewellery has remained robust - and rather more resilient than in other parts of the world, notably the US, due in part to a strengthening currency and the rate of economic growth. Retail sales remained strong and Chinese manufacturers reported slightly higher levels of jewellery production than in 2006, although higher scrap return constrained the increase to just 20,000 ounces, taking Chinese jewellery demand to 780,000 ounces last year.
JM does note, however that while the Chinese jewellery trade coped well with the rising platinum price for much of the year, manufacturing volumes eased in the final quarter of the year and the impact on the market was exacerbated by manufacturers' efforts to reduce inventory. Demand is likely to be boosted by the Olympics this year and low inventory levels bode well for offtake for the international market, as has indeed been indicated by turnover on the Shanghai Gold Exchange in the early part of this year.
While slowing economic growth is likely to impede platinum demand this year, Johnson Matthey asserts that overall demand may well exceed that of 2007. Although Chinese jewellery demand remains reasonably robust, global jewellery demand remains under pressure, while growth remain underpinned by emission control catalysts and the world's continued desires to look at flat screens, be they televisions or personal computers.