Production problems mean that the demand for platinum will exceed supply in 2007, which could push platinum market prices as high as $1,700 an ounce by the end of next year.
On an ounce-for-ounce basis, platinum is over 80% more expensive than gold and almost 10,000% more expensive than silver.
The white metal is the most precious of the traded metals simply because of its relative scarcity.
Global mine production supplied only about 214 tons of platinum in 2006. This was equivalent to only 8.7% (by weight) of the world’s total gold production and about 1.2% of the silver production for the same year. Take a look at the chart below…
Platinum is found at much lower grades than gold or silver. On average, ten tons of ore must be mined–sometimes miles underground at temperatures greater than 120ºF–to produce a single ounce of platinum.
Stacking Platinum up to Gold and Silver
Relative to volume mined, platinum has more industrial uses than either silver or gold. In fact, more than 50% of the world’s annual production of platinum is used in industry. Most of the rest goes toward jewelry manufacturing (about 40%) and investment (about 10%). This is unlike gold, where most of supply is used for jewelry (about 70%) and investment (about 20%).
Also unlike gold , there are no large inventories of above-ground platinum. Therefore, a breakdown in major supply sources could catapult platinum market prices into orbit.
And that’s exactly what’s happening. See for yourself in the following 5-year platinum price chart…
Unlike most other commodity metals, which are found throughout the world, major platinum deposits are limited to two main areas: South Africa and the Commonwealth of Independent States (the former USSR).
And South Africa is by far the most important of the two, as it accounts for approximately 80% of the world’s total annual mine production. South Africa also accounts for 88% of the world’s platinum reserves, with a proved and probable reserve estimate of 6,223 tons, or 223 million ounces.
It’s also interesting that more than 90% of the world’s platinum production comes from only four mines–three in South Africa and one in the CIS.
Platinum Prices and the Supply – Demand Factor
In light of the metal’s extreme scarcity, platinum’s supply-demand dynamics are tight and getting tighter every month. A drop in mine supply has contributed to platinum prices rising almost 33% this year to a recent record of $1,498.80 an ounce on November 7.
Global platinum supplies are expected to fall 135,000 ounces, or 2%, to 6.66 million ounces this year. Meanwhile, demand is expected to increase by 195,000 ounces, or 2.9%, to a record 6.925 million ounces.
This would leave the platinum market with a supply deficit of 265,000 ounces, the seventh year in the past eight that the market has recorded a shortfall. In 2006, the platinum market recorded a tiny surplus of 65,000 ounces.
Industrial usage of platinum is forecast to continue rising this year, up 40,000 ounces or 2.1% to 1.91 million ounces, with the automotive industry providing the main source of growth.
Heavy-duty diesel vehicles have just started to have catalysers fitted. This market is in its infancy, and further tightening of US and European emissions standards would require more platinum per vehicle. Auto catalyst makers, however, are continually seeking ways of reducing platinum usage in each catalyser. Manufactures can use palladium as a cheaper alternative.
Increasing usage of fertilizers to meet rocketing biofuel demand has also increased platinum consumption in the catalyst gauzes used in nitric acid production.
Rising platinum prices, on the other hand, continue to weigh on jewelry demand, which has been falling since 2002 and is forecast to fall 25,000 ounces, or 1.5%, to 1.60 million ounces this year. However, China has seen a small increase in jewelry demand and sales are also reported to have been strong in the UK and Switzerland, but much weaker in the US and Japan, which account for 95% of the platinum jewelry demand.
While the western world’s industrial demand is understandably a function of economic growth, which increases at a moderate rate, demand for platinum in countries with emerging economies–like China and India–is exploding.
It is well known that China has enjoyed the highest percent of annual economic growth of any nation in the world during the last ten years. And there doesn’t seem to be any slowing in the foreseeable future. The country’s platinum consumption has grown apace with its annual industrial production increases. China’s future platinum demand alone will tax the current production capacity of the four major mines.
As platinum’s supply-demand squeeze becomes tighter, platinum prices will inevitably continue to march higher. I expect platinum prices to trade relatively flat during the first half of 2008, building a base on the strong side of $1,400 an ounce. After that, I believe platinum has the potential to peak near $1,700 an ounce later in the year.
Until next time,
Luke Burgess
