In Johnson Matthey's latest annual review Platinum 2009, the company states that although it does not see a strong recovery in automotive and industrial purchasing of platinum within the next six months, any concrete signs of improvement in the economy should attract increasing fund investor interest and platinum could strengthen to as high as $1,350/ounce. The price should deliver good physical support from strong physical buying in Asia and from platinum's promising longer-term fundamentals, giving the market a price floor of $950 during the same six month period. On the basis of today's prices (c. $1,110/ounce), therefore, platinum has a 15% downside risk, but an upside potential of 22%.Demand in the automotive industry is expected to fall heavily this year for platinum, palladium and rhodium, while most other sectors are expected to take less metal on the basis of comparatively low end-product demand and limited scope for new manufacturing capacity.JM points out, however, that it is important to remember that prices were very high during early 2008 and that annual demand could strengthen this year despite the economic downturn, The jewellery and investment markets have already testified to this in late 2008 and JM argues that if the present price environment were to persist then it would support platinum and palladium demand again in 2009.The impact of the frail global economy was relatively limited in 2008 because of the nature of much of the platinum demand. In sectors such as glass and much of the chemical industry demand is driven by the construction of new plant and the slowdown in requirements of flat panel glass and many commodity chemicals came relatively late in the year. There were cutbacks in the production of many of these products in the final quarter of the year, but the impact on platinum was minimal over the year a whole. There will be a knock-on effect on platinum demand this year due to the weak economy and a lack of availability of project finance and it is likely that the impact will be felt beyond 2009.The bright spot is the jewellery sector, where demand is expected to rise strongly this year as the very high levels of recycling in China and Japan in 2008 fall away sharply. This reduction in scrap supply has already been augmented by an increase in manufacturers' stocks of metal and finished product. In addition to this consumer purchasing in China picked up in the final quarter of 2008 and remained buoyant in the first quarter of 2009, leading to extraordinarily strong buying pf platinum through the Shanghai Gold Exchange so far this year. This rate of demand is not expected to be sustained over the year as a whole, but increased Chinese jewellery demand is expected easily to outweigh the weakness in the North American and European jewellery markets.JM argues that investment demand remains price-driven and is therefore hard accurately to forecast, but does point out that falling prices have driven a resurgence in retail investment in Japan, while suggesting that a continued rise in the platinum price will encourage more investment into the ETFs. Net demand through the ETFs is expected to be higher in 2009 than it was in 2008.On the supply side, global platinum group metal production is expected to increase this year, but none of the wide range of challenges faced by the industry in 2008 is expected to abate to any great extent this year and production increases are therefore expected to remain limited. The company notes that the mining industry has started to cut its output in the face of the sharp falls in base and precious metals prices, but that the cost of reopening mothballed operations means that relatively few companies have cut platinum output significantly. The main response in South Africa so far has been a reduction in capital expenditure and that although this will have little short-term impact on South African platinum group metal production it will constrain any growth in output over the longer term. JM is looking for some limited growth in South African platinum supplies in 2009, but for North American and Russian sales to fall. Supply and demand, which were not that far away from one another in 2008, are expected to be more closely matched in 2009.
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