Platinum review

Leading precious metals group Johnson Matthey has released its interim update to its "Platinum 2010" review, in which it forecasts that platinum will be in a surplus of 290,000 ounces in 2010. Johnson Matthey works on a sales and purchases methodology and on this basis the group is looking at demand this year of 7.56M ounces, so this surplus is equivalent to just two weeks' world offtake. This surplus is substantially less than that delivered in 2009, driven by a large recovery in demand; primary supply is forecast to be virtually unchanged from 2009 levels, but recycled production is expected to grow by just over 400,000 ounces or 31%, with large increases in return from both the jewellery and the automotive sectors.

Investment is forecast to be lower by 34% against 2090, but it's a mixed picture. In Europe it has fallen away to almost nothing; JM estimates 10,000 ounces after 385,000 ounces last year and an average of almost 230,000 ounces per annum in 2007-2009. In Japan it is also down from 2009, but at least it's in the positive column by comparison with the middle of the decade, when Japanese investors were net sellers. JM notes that Japan is the "principal market for large bar trading" and that fresh demand for these bars this year has been met in large part by liquidations as result of higher prices.

In North America, meanwhile, the feeding frenzy in the precious metals sector has spilled into platinum, with JM estimating investment of 365,000 ounces this year against 105,000 ounces last year - and just 20,000 ounces in 2006. This is of course anchored around the new PGM ETFs launched at the start of the year; the new New York fund added almost 245,000 ounce in January. Redemptions elsewhere meant that the net addition in that month was roughly 217,000 ounces, still a large amount that helped to drive prices from $1,500 to $1,600 in the first fortnight of the year.

The company also points out that demand for coins and small bars is expected to be low this year, at roughly 15,000 ounces. The US Mint has not been offering any Platinum Eagles this year, but has produced proof coins, as has the Perth Mint in Australia.

The major change lies of course in the automotive sector, with an increase of 800,000 ounces, while glass use is rebounding smartly, and there are clear improvements in the chemical and electrical sectors. Jewellery is down from last year's demand, falling from 2.8M ounces to 2.4M ounces.

The increase in the automotive sector is put at approximately 37%, although it will not, this year, regain levels enjoyed prior to 2009. Growth in demand was high in the first half-year as fleet purchases increased and scrappage incentives (which had favoured the purchase of smaller cars) finished. This benefited diesel sales in Europe, which is by far the world's largest region in terms of automotive demand for platinum; the auto sector in Europe is expected to take up 47% of world auto requirements for platinum this year on a gross basis, and 55% net.

The company expects a further increase in automotive platinum demand in Europe as diesel increases its market share towards 50% in the region. We detect a possible note of caution, however; vehicle production is forecast to exceed sales as the run-down in inventories is reversed [we wait to see how the European economy performs next year and whether this impedes further inventory adjustment - although JM is expecting a sharp increase in demand for fleet vehicles over 2010 as a whole.]. JM expects the substitution of platinum with palladium to continue in "aftertreatment formulations", and also notes "aggressive thrifting" of platinum, although platinum will remain the dominant component of these systems. The increase in fleet vehicle demand will favour platinum through its use in diesel oxidation catalysts and in diesel particulate filters.

Jewellery will be constrained by high prices and is expected to fall by 390,000 ounces on a gross basis - but by 560,000 ounces net. China, the lynchpin of the market, has been notably price-responsive this year and gross demand is failing while scrap return is increasing - although this is by comparison with 2009, which was a very strong year. Jewellers have had ample inventory this year and this has reduced their purchases. There has been healthy buying on dips in price below $1,500, but JM argues that there is evidence to suggest that stock levels have remained "relatively healthy" due to rebuilding in 2009 and this is deferring some purchase activity. The company also points out that platinum's fall in price in 2008 may have undermined the belief, held by some Chinese purchasers, that platinum is a medium of investment. This is in contrast with gold, where jewellery purchases have increased, partially in response to the consistent rise in the price of that metal. Furthermore, high platinum prices this year have not only deterred prospective purchasers but increased the flow of scrap.

Elsewhere industrial demand (glass, chemical, electrical for example) have benefited this year from re-stocking, with a number of plants also running at higher capacity than in 2009. The exception is the petroleum industry, where there is little new capacity being installed this year. [Much platinum use in industrial sectors is as a catalyst, much of which can be recovered when the catalyst is spent, so revolving demand is low. It jumps massively when a new installation is put in, requiring fresh metal].

The use of platinum in glass manufacturing is expected to grow this year from a very depressed level in 2009 and to overtake 2008 levels (but not reach those of 2007); this is driven primarily by new LCD manufacturing plants in China, Japan and the "Rest of the World" in particular; existing plants are restocking as end-product demand picks up, driven in particular by flat screen televisions.

So from cleaning up automotive emissions, to facilitating chemical production, oil reforming and - among other things - supporting LCD output and expanding its role in the medical sector, this "green" metal is enjoying a revival in demand in 2010. .

Johnson Matthey avers that after a strong first half to 2010, the outlook for the rest of this year and into 2011 is "less certain"; given external economic and fiscal forces that may hamper economic growth. Autocatalyst and industrial demand are expected to continue their recoveries (with the former boosted by fresh tightening in emission control standards), and the company expects that near-flat primary production and increased recycling will mean that the metal is likely to remain in a moderate surplus next year also.

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