Isra-Mart srl: What is next for platinum?

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Growing concerns about economic growth are weighing on prices but, a surge in investment demand for precious metals is helping to boost demand while, at the same time supplies remain tight.
Despite growing concerns about growth in both the US and Europe and inflation worries in emerging markets, platinum prices rose fairly steadily in August.

While platinum rose from $1,778.25 at the end of July to a current price around $1,884 per ounce, this is a much tamer performance than the nearly $300 jump in gold prices over the same period.

But, with gold once more trading at a premium to platinum and concerns of an increasingly severe downturn growing, the next likely move for platinum is by no means certain.

Jonathan Butler, speaking on Mineweb.com's Metals Weekly Podcast, said that after a first half characterised by robust autocatalyst demand, "When we published our review of the market in May we said we'd expect growth in auto catalyst demand in both platinum and palladium this year though perhaps not at the rate we saw in 2010 when those markets were coming out of recession - and we'd still stand by that although we have of course seen a bit of turmoil, especially with the US debt crisis and also continuing Eurozone concerns over sovereign debt."

He adds that, while one cannot rule out the possibility of some kind of double dip recession which would have a severe impact on industrial demand and, indeed, all of the pgm demand sectors, the indications to date are that the situation is not quite on the same scale as what occurred in 2008.

But, he says, "At the moment it's a case of "wait and see". We haven't seen demand falling off a cliff - far from it. In fact we've seen fairly steady, robust increases in demand over the first half of this year. We'll wait and see what the second half brings, but as you say there are some headwinds that the world economy faces, and we have to take that into account when looking at our demand forecasts."

In its latest Metals Monthly Report, the VM Group, is a lot less bullish, pointing out that " A sombre mood has engulfed the PGMs owing to expectations for auto production and global growth to disappoint this year and in 2012. Investor flight from risk in the wake of the ongoing European sovereign debt crisis, the downgrade of US treasuries and poor second quarter growth figures from major market sectors have likely led to a reallocation out of the PGMs primarily into cash and gold."

It says, " With a slowdown rapidly approaching for advanced economies, emerging markets are bound to be bruised, primarily through exports. Although, they proved fairly resilient during the last global downturn, growth in the fast growing and key auto markets in the developing world is likely to be less robust this time around."

But, it does add that the "economic backdrop has never been more positive for the investment appeal of precious metals as a safe haven as well as in terms of currency hedging; the PGMs could easily remain range bound in the coming months, pinned between opposing bullish and bearish factors."

One of the big uncertainties is what is likely to happen in China which is the world's second largest market for pgms.

For Butler, while it is not yet certain what is likely to happen, "Looking at the evidence over the past six months or so, demand for palladium, particularly from the car industry has been strong. We don't really see any evidence of a major slowdown in chemical or electrical demand. Of course that's generally a positive thing for platinum - and platinum jewellery demand has been pretty robust this year, so we're expecting for the full year - barring any really exceptional events - that China will again be an engine for growth in the PGM market."

While autocatalyst demand remains a key driver, investment demand for the metal is beginning to play an increasingly significant role as is evidenced by the robust levels of platinum ETF demand..

As the VM Group points out, "Total volumes in platinum ETFs, at 1.4 Moz, remain near the record level set in March. From end-2010, combined holdings have risen a healthy 15% or 176,573 oz."

As Butler explains, "What we tend to see is that as the gold price moves higher, we also get a higher platinum price apart from at certain times when there's that kind of risk averse mentality. Over recent weeks we've seen additions into exchange traded funds particularly in platinum and we've seen a lot of that growth of course happening over the last two or three years as ETFs have become increasingly popular amongst investors."

"It's very hard to forecast how individual investors will react to particular events, but as you implied with the buying of gold we might also see buying platinum as a hedge or we might see a certain quantity of gold being bought and a proportional quantity of platinum," adds.

In a note to clients out last week, French Bank Natixis, also points out the possibility that, with the very gold now at a premium to platinum, some investors may be looking to diversify their precious metals exposure.

It says, "At the current ratio of 1, platinum may become more attractive to investors in precious metals, not only for traditional platinum buyers such as Japan and China, but also potentially as a source of diversification. As gold continues beating new records, concern about a bubble in the yellow metal is rising, and platinum could present an attractive alternative now that both are at the same price. While the price ratio has oscillated around 1.2 over the last two years, prior to 2008 it traded between 1.7-2.3."

This is all complicated by a tight supply picture for the metal exacerbated by cost issues in major producer, South Africa.

As Butler points out, "A lot of the mines at the moment are at least cash positive with current PGM prices, but that's not to say that they are generating enough cash to invest in future production. And probably the real pressure at the moment is all of these rising costs are actually negatively impacting on the potential investment that might be going into future production capacity."

He adds, " The uncertainty on the supply side has certainly provided some support to prices recently. We have seen some volatility of course in recent months, but overall the robust demand situation and constrained supply situation have underpinned the price to a large extent.