Platinum Still Trying To Dig Out

Johannesburg-S.A. (Mar 22)  In the past year or so, the “precious” seems to have drained out of precious metals. Prices have drifted downward, and every rally has been met by more selling.

Platinum is no exception. Prices haven’t rallied, even though South African platinum miners held a strike for five months last year. South Africa holds about 80% of the world’s platinum reserves, and is responsible for roughly 75% of annual production worldwide.

In 2014, platinum prices lost 12%, and have dipped a bit this year. Now, prices are at their lowest level since 2009, reaching $1,100 per ounce on Tuesday.

But what about the rest of 2015?

The Problem With Give and Take

Well, on the plus side, platinum supplies are still rather limited.

South African miners are back at work and overall global production will rise over 2014 levels by 10% to 12%, to nearly 8 million ounces.

That’s still below the level it was at two years ago, however. And investors should also keep in mind that labor tensions continue to simmer in South Africa – a situation that’s unlikely to improve any time soon.

Even before the labor dispute, many South African platinum mines were unprofitable. Now, after the strike, many of these mines have been put up for sale. It’s unlikely that many buyers will step forward to buy mines that are known to be money losers with labor tensions.

Overall, about half of the world’s platinum mines are unprofitable at current price levels, according to JP Morgan. So, investors shouldn’t be shocked if they hear of many platinum mines shuttering, taking supply off the market again.

And despite labor peace (for now), this year will be the fourth in a row that the platinum market is in a deficit.

In addition, above ground inventories are being depleted. Last year’s strike drew down stockpiles by about 20%, according to the World Platinum Investment Council (WPIC). The WPIC says inventories were at 2.53 million ounces at the end of 2014, which is down from about 50% since 2012.

Unfortunately, the demand side isn’t very bullish, says the WPIC. It dropped 7% last year.

This year demand growth from the two biggest users of platinum, the jewelry and automotive industries, is expected to be sluggish.

Jewelry demand from China accounts for two-thirds of the global platinum jewelry market. But with China’s slowing economy, demand from the country fell by 1.3% in 2014. This year, the demand forecast isn’t much different.

One bright spot in jewelry demand, though, is India. Demand there rose by about 25% in 2014. It’s expected to jump another 15% this year, to 200,000 ounces.

But, the real fly in the soup for the platinum market is the demand from the automotive industry.

Driving European Threat

Platinum is used in the catalytic converters for diesel-powered vehicles, which is responsible for about 40% of annual platinum usage.

The biggest market for diesel vehicles is Europe, but the governments there are cracking down on the use of such vehicles as part of further emissions reforms.

Governments there had pushed for diesel-powered vehicles because they’re low emitters of carbon dioxide. But now the focus is on other pollutants, such as nitrogen oxide, that are emitted by diesel cars and can cause respiratory ailments.

The French government, for example, has said it would progressively ban diesel vehicles starting this year. These vehicles account for two-thirds of car sales in France.

This crackdown is occurring despite the fact that newer diesel vehicles are less polluting – the newest diesel cars capture about two-thirds of nitrogen oxide emissions in filters.

The good news from the platinum producers’ viewpoint, though, is that diesel vehicles probably won’t be entirely phased out in Europe for another 10 to 20 years.

Other “Precious” Factors

Jon Swyers of Asset Strategies International pointed out a few other factors to consider when making a judgment about the platinum market.

The first is the platinum-to-gold ratio. Historically, platinum trades from 1.1 to 1.3 times the price of gold. But now, it’s actually trading below the gold price!

Secondly, there’s a large net-long position in the futures market. The Commitment of Traders Futures and Options Report from March 3 showed that non-commercial and non-reportable traders had a not-long position in excess of 27,000 contracts. Meaning, someone thinks platinum is cheap…

But what’s the bottom line then?

Probably a small upward bias in price. Supply is still under stress and the results of the European crackdown on diesel are years away.

Reuters GFMS Annual Surveys forecasts the platinum price will rise into the $1,300 to $1,350 range this year.

That’s a nice jump from the current $1,100 price. And for investors, that will be reflected in exchange-traded funds such as the ETFS Physical Platinum Shares (NYSE:PPLT).

Source: WSJ