Weak industrial offtake and the scale of current investment positions underline the proposition that, despite the potential for a very good jewellery market in 2009, platinum's fundamentals have taken a turn for the worse. There is a possibility of a dip towards $900, while - partly aided by potentially bullish market views on gold - there is scope for a test of $1,375 during 2009, although this could well be short-lived.The new annual Platinum and Palladium Survey from GFMS Ltd records an improvement in net jewellery demand and strong retail investment during 2008, but it warns that this latter has waned in 2009. Platinum remains overshadowed by the grim position in the automotive sector, and GFMS suggests that the high levels of ETF allocations and the long net speculative position on NYMEX may be discounting a tightening market, based on the possibility of significant mine production and the start of an improvement in autocatalyst demand.In its supply-demand analysis, GFMS records broadly flat supply in 2008 at 8.1 million ounces with production losses in South Africa being countered by surging supplies of scrapped jewellery. Global mine production contracted by 7% in 2008 to 6.2 million ounces, with the losses dominated by South Africa, with an 8% fall of 403,000 ounces to 4.7 million ounces, the lowest level since 2002. Scrap supplies were inflated while overall industrial demand (excluding retail investment, which is discussed in an accompanying article on this website) fell by 8%, with the vast majority of the fall accounted for by reductions in autocatalyst and jewellery demand. The only sector of note to record an increase in demand was the glass industry.Underground mining in South Africa was halted for five days in January as a result of the force majeure declaration from electricity supplier Eskom, while the position was compounded by issues such as safety management, smelter problems and geological difficulties. All of these were exacerbated by the subsequent plummeting in platinum prices. On the secondary side, autocatalyst scrap return increased again in 2008, although this was a smaller absolute increase than between 2006 and 2007, rising by 8% to almost a million ounces, but the key element in secondary supplies last year was scrapped jewellery. This increased from almost 543,000 ounces in 2007 to 910,000 ounces in 2008, a rise of almost 370,000 ounces or 68% as jewellery scrap in Japan actually rose above gross domestic jewellery fabrication levels and this had a significant impact on price performance. Global jewellery scrap supply was therefore roughly 91% of the level of scrapped autocatalyst supply and between them they amounted to just over 1.9 million ounces, adding some 31% to mine supply levels.Gross platinum jewellery fabrication declined for the sixth consecutive year in 2008, falling by 12% to 1.65 million ounces, driven by the fall in demand in Japan (before scrap return is taken into account). Chinese demand increased again, its second year of recovery after four years of declines. It is arguable that 2007 was a year of transition as the increase was marginal over 2006, but in 2008 Chinese demand increased from 877,000 ounces to 910,000 ounces, a rise of almost 4% which undershoots industrial growth rates, but nonetheless reflects increased interest in platinum as a result not only of reduced outright prices, but also the contraction in platinum's price premium over gold. Jewellery demand was down in all other regions in response to economic conditions. Autocatalyst demand was hit by economic conditions. Unsurprisingly, North America was the hardest hit with a fall of 25% in gross platinum demand, while offtake in Europe and Japan was down by 6% and 5% respectively. Chinese demand was steady and there was a small increase elsewhere as these emerging markets are not yet mature.Demand in the glass industry increased for the third successive year as a result of expansions in LCD (liquid crystal display) glass manufacturing and new capacity installation for glass fibre composites. Glass demand did actually contract in North America and Europe, but sustained healthy growth of almost 10% elsewhere. This is underpinned by sustained growth in demand for flat screen displays, driven in earlier years by the computer industry, but with the momentum now taken up by television where LCD technology is now dominant. LCD global market share in this sector ahs increased from less than 5% five years ago to almost 50% in 2008, the first year in which it overtook Cathode ray tubes.There are two sides to this story, however, with LCD glass expansion running at a slower rate than in ‘07 and, with deteriorating economic sentiment, a number of projects were delayed or postponed; furthermore as cathode ray technology contracted so some platinum group metal alloys became available for recycling.This is but one example of the concerns overhanging the market in the face of an uncertain economic outlook. The key to the sector remains the automotive industry, with jewellery not far behind and one has the prospect of recovery while the other is to some extent price-elastic. GFMS warns that the scale of current investment positions suggest the risk of a sell-off towards $900, although at that point, in the Group's view, there would be the scope for significant support for m jewellery demand and bargain hunting investors who would, at that price level, be eyeing production cuts. The scope for upside appears more limited and even elevated jewellery demand would probably be unsustainable at much above $1,200.
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