Platinum & Palladium Survey 2011 - GFMS

GFMS, in its recently-published "Platinum & Palladium Survey 2011", is forecasting that platinum will sustain a gross surplus in 2011 of a similar magnitude to that of 2010. Mine production is expected to increase modestly this year, and while GFMS describes the situation in South Africa as "challenging", including risks surrounding this year's wage negotiations, the prospect of a repetition of the major disruptions of 2007 and 2008 is relatively low. The prospect of relatively buoyant prices also underpins increased supply from recycling and GFMS doubts that fabrication demand this year and keep pace with supply, let alone exceed it.

Platinum's underlying fundamentals in 2010 are described as "distinctly lacklustre" and, as above-ground stocks increased for the sixth successive year, the momentum in platinum prices was arguably almost entirely a function of investor activity. GFMS identifies 550,000 ounces of ETF investment in 2010 as well as 76,000 ounces of retail investment (although this latter is taken above the line in the supply-demand balance), but even after this investment activity the market was left in a substantial residual surplus, suggesting that non-investment inventory has grown by over a million ounces in the past ten years. This increase is the equivalent of over two months' fabrication demand and gives the lie to suggestions that the platinum market is light on inventory.

GFMS argues that the central planks of the case in favour of the precious metals sector are still intact and although the PGMs are primarily industrial metals, they have been benefiting from the factors bolstering gold investment. Indeed the case is made that investor sentiment in platinum has become increasingly influenced by the broader investment climate, and investor attitudes to gold in particular, given that one of platinum's drivers, the risk of supply disruptions and/or the economics of mine production has been broadly absent in the past two years, while the market has also been in surplus.

Palladium's price increases, by contrast, have stemmed from a better set of underlying fundamentals, both existing and prospective, with a resultant higher percentage increase in price than platinum over the past two years, and a larger absolute gain in 2010.

The Survey includes its usual in-depth analysis of all the aspects of the metals' markets and their fundamentals; there follows one interesting highlight in the shape of Chinese jewellery.

Chinese jewellery has been one of the key stories of the platinum market over the past decade. After reaching almost 1.7M ounces in 2002, Chinese demand for platinum jewellery fell to 835,000 ounces in 2006, before starting a recovery. In 2009 it was close to the 2002 record at 1.6M ounces, but fell back to 1.2M ounces last year, or 62% of world jewellery demand and 18% of world fabrication demand. This 26% fall, accompanied by a small decline in Europe, while there were marginal increases in North America, meant that, with the exception of the petroleum sector, jewellery was the only end-use where demand contracted in 2010. The increase in North American demand came largely from a recovery at the luxury end of the market, rather than an overall lift.

The Chinese market is price-sensitive and high prices accounted for a good part of last year's fall in the local jewellery sector, but GFMS also points out that the trade held high jewellery stocks at the start of 2010 and so there was little demand for any re-stocking, especially given the high price. (In fact there was little industrial re-stocking anywhere in the platinum using industries last year). The Group does underline the fact, however, that Chinese demand in 2009 was exceptionally high and that Chinese jewellery demand was, in 2010, the second-highest since 2004. Furthermore in metal value terms, demand was roughly level with that of 2009 and given that a good part of 2009 demand came from the trade's re-stocking, actual consumer expenditure was higher in 2010 than in 2009. GFMS produces an in-depth study of the sector and notes, inter alia, that after a rapid expansion in jewellery manufacture capacity towards the end of the past decade, retailers have had to cut margins in order to retain sales in the face of weakening consumer demand; one of the by-products of this has been a switch among manufacturers from PGM to gold and descries this shift to gold as "quite dramatic" in 2010.

Although prices are expected to remain high and volatile in 2011, GFMS believes that robust economic growth and a return to normalisation of inventory replenishment by the trade will result in some modest growth in Chinese platinum jewellery offtake in 2011.

GFMS is suggesting that the strength of the investment environment for the precious metals will again overpower platinum's unprepossessing fundamentals this year and that, despite the likelihood of a further significant gross surplus, prices will remain elevated. A high of $1,925 is suggested, most likely coinciding with a gold move through $1,600; while the downside is constrained to $1,675, a level that GFMS expects would be likely to attract considerable support from the jewellery market tin China, as well as renewed investment inflows.

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