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Investing on Platinum Supply Deficit

Platinum Prices to Break Out

Written by Brian Hicks
Posted June 18, 2013

If you haven’t been looking at platinum, you need to pay attention. Although the fortunes and fluctuations of gold has been grabbing attention since April (and, more or less, every other week), it’s platinum that is going to be really interesting over the near future.

platinum This is because, due to prevailing strife within the South African mining sector, a severe deficit in platinum supplies is anticipated over 2013. On a normal day, that would cause you to conclude that prices will probably jump higher. But combine that with the finding that demand for platinum is growing from an expanding automotive sector and a newly-created ETF, and you now have a scenario where platinum prices—by all accounts—ought to skyrocket over the next few months.

CNBC reports that earlier in June, platinum went all the way up to $1,531—a six-week high—after a new ETF was launched. CNBC cites James Steel, chief precious metals analyst at HSBC, on the matter.

Steel believes platinum prices will certainly continue to rise over the next two years, with averages over this year predicted to be around $1,580 and for the next year around $1,725. Platinum was trading at $1,448 on Monday, so that amounts to a gain of 9 percent over 2013 alone.

However, the ripples from gold have indeed affected the fortunes of platinum. From February, we’re now down 17 percent. Steel believes platinum is likely to peak at around $1,875 by 2015 before subsiding to $1,825. But it’s the ETF that is really shining right now.

From CNBC:

"The launch of the South African ETF in mid-May has already attracted a whopping 371,000oz of platinum demand to date. This is more double the growth in the rest of the platinum ETFs combined this year," he added.

Those are impressive numbers given the sheer size of the deficit that is anticipated. According to HSBC, the deficit could be as high as 844,000 ounces over the year. Demand will be driven strongly by the ETF and the automotive sector, while supply will continue to shrink. Total worldwide production is indicated at c5.646moz over 2013, with South Africa contributing the lion’s share. Nonetheless, that’s still a good drop from previous expectations—6.3 percent lower—basically continuing 2012’s levels.

MineWeb cites Emma Townshend, metals and mining analyst for HSBC, on the question of South African mining problems:

“Miner’s unions are demanding double-digit pay increases, which are well above producer offers. Low prices mean that producers are not in a financial position to meet union pay demands and some producers such as Amplats have built stocks in anticipation of production interruptions, due to strike action.”

Supply and Demand Worldwide

Overall, South African platinum production is likely to decrease 8 percent through 2013 to c4.066moz. Russia, meanwhile, can reasonably expect an increase of 1 percent in production (i.e. to 765,000moz), while Zimbabwe is likely to remain steady at 375,000moz. The North American picture is bleaker, with no gains expected whatsoever; forecasts have accordingly been reduced by 13 percent.

Meanwhile, demand from North American and Chinese automotive companies continues to grow. Platinum is heavily used in automobile catalysts, and both these markets exhibit growing demand, although the total level of demand is tempered by Europe’s continued economic malaise. Thus, the weak demand from Western Europe is expected to exert a slowing influence on demand from platinum from the auto sector.

However, China—despite recent falters in economic growth—continues to enhance its perception of platinum as not just a premium industrial metal but also a luxury good. As such, platinum is being marketed with increasing prominence in the jewelry and luxury goods sectors, meaning demand could grow from those sources.

The NewPlat, the ETF I’ve been talking about, now holds 375,802 ounces as physical backing for its securities. That represents almost a fifth of all the platinum held by ETFs (some 1.83 million ounces), reports Reuters. The fund was launched by Absa Capital in late April, and all the supply/demand issues outlined above indicate a bright future for the fund.

Even the New York ETFS Physical Platinum Shares (NYSE: PPLT), the largest single platinum-backed ETF, has seen its holdings expand by 120,000 ounces and more this year alone. There is clearly a growing shift toward investing in platinum, since all reasonable indicators predict a powerful upward trend that’ll last at least the next two years, if not more.

 

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