Platinum: Higher Surplus, Strong Demand to Persist in 2019

Suddenly, platinum is attracting investor attention even though the market is in clear surplus. Despite the fact that prices had been falling in recent years — widening the differential with gold and palladium — investor interest in platinum is increasing possibly because of ‘perceived value’.

For instance, platinum ETFs (exchange traded funds) have registered robust inflows – estimated at about 400,000 ounces — since the start of this year, reversing the falling trend of recent years.

A report released by the World Platinum Investment Council (WPIC) recently showed that for the third year running, the world platinum market will face high levels of surplus supply. At 680,000 ounces, the surplus estimated by WPIC is seen as significantly higher. In 2018, the surplus was 645,000 ounces. Supplies from South Africa and increased recycling of auto-catalysts are also seen contributing to augmented availability. This level of supply should put downward pressure on the price of the metal.

Industrial demand

However, the demand side is not looking weak. If anything, demand is set to grow by about five per cent to about 7.74 million ounces this year. Admittedly, demand for the metal from the automotive industry is expected to decline this year as experts cite more stringent emission standards that require higher loadings of platinum in auto-catalysts as well as stabilisation of the diesel market share in Western Europe as reasons.

Interestingly, high palladium prices are helping platinum. The WPIC asserts there is increased likelihood of more platinum being used in gasoline engines in future, replacing, even if partially, the currently expensive palladium. Demand from the chemical industry too is seen rising.

Yet, the supply growth will overwhelm demand growth which should put downward pressure on prices.

Price outlook

Notwithstanding this, the metal was trading at $834/oz, significantly higher than late December 2018 rate of $789/oz.

Two reasons may explain the price developments in the platinum market: one is a $700-per-ounce price differential with its kindred metal palladium which makes the former an attractive proposition. The second is the likelihood of a strike in South African platinum mines. The origin accounts for as much as 70 per cent of world supplies.

In the last four weeks — that is after the strike call — price of the metal has spurted. The pace has been accelerated by a swift flow of speculative funds into the derivatives market.

Interestingly, platinum is currently trading about $450 lower than gold. However, the differential is unlikely to boost jewellery demand for platinum.

Although platinum may not exactly enjoy a bull-run because of the surplus, in the months ahead the metal is likely to trade firm within the broad range of $800-900 an ounce. Demand growth considerations and potential of supply disruption, if strike in South African mines materialises, will combine to keep the metal in focus in the next few quarters.

Outlook for palladium

On the other hand, palladium currently trading at a record $1,549/oz (as of March 12) is set for a correction. One can imagine the massive spurt by comparing with $1,260/oz traded late last year. The metal is holding up well despite negative news of a decline in Chinese auto sales. But most believe, palladium has overshot to the upside and a correction is imminent.

Courtesy: Hindu Business Line