LAWRIE WILLIAMS: Platinum and palladium supply deficits ahead, but will this impact prices?
Yesterday we published an article on the state of the pgms market as viewed in the latest reports from GFMS and the World Platinum Investment Council (WPIC) See: Is platinum in surplus or deficit? Reports contradict. As suggested by the title, the reports agreed to differ, quite sharply, on the supply demand balance for platinum in 2015. While the GFMS figures suggested platinum supply moved back into surplus of some 265,000 ounces in 2015, WPIC numbers, researched by SFA (Oxford) suggested that there was a deficit last year and quite a substantial one at 315,000 ounces. Both agreed, though that there would likely be a substantial deficit this year – WPIC putting a figure on it at 455,000 ounces. GFMS didn’t give a precise prediction but did say that it expected platinum to return to a small deficit in 2016 due to projected lower mine supply due to capital spending restraints following on from low prices.
Thus the third major report on the sector – from the other major London-based Precious Metals analytical consultancy, Metals Focus – which released its inaugural 78-page Platinum and Palladium Focus 2016 report yesterday afternoon which was awaited with particular interest to see how it saw the state of the pgms industry. It came out with figures suggesting a deficit last year – but falling somewhere between WPIC’s largish shortfall and GFMS’s small surplus. The Metals Focus analysis thus suggested a deficit of 122,000 ounces before any movements out of above-ground stocks. But, like the other two reports Metals Focus was also forecasting a deficit in 2016, and was prepared to put a figure on it of a fairly substantial 567,000 ounces – and also predicted an additional likely movement into above ground stocks as inventories are partly rebuilt bringing a negative 667,000 ounces as the likely market balance.
Taking all three reports into account there does seem to be a consensus that platinum is moving into a period of deficit with the obvious conclusion that with strong fundamentals prices should strengthen over the year – incidentally an opinion expressed later in the day at an AMA/Sharps Pixley debate at the Royal Institution by one of the panellists who suggested that investors should move out of gold and buy platinum because of the latter’s strong fundamentals. (It was perhaps unkindly pointed out by one of the other debaters that platinum’s fundamentals had also looked particularly strong over the prior two years yet the price had, in the event, fallen sharply. Such are markets!).
Metals Focus did allude to this in recognition that the weak gold price added to the price pressure on the pgms during the year – and this indirectly supports our view, noted in yesterday’s article linked above – that pgm prices are primarily substantially affected by the progress or otherwise of the gold price regardless of their being in reality industrial metals. The same is true of silver too, although this does have more historical monetary antecedents. Overall Metals Focus does see platinum prices rising over the year, but sees the upside potential as limited by perceived lack of investor interest.
As for palladium there is general consensus that this will move further into supply deficit as autocatalyst demand continues to rise and mine production remains constrained. Palladium supply has been in deficit for five years now according to Metals Focus yet the price has not reacted accordingly at all. Almost every year analysts look at the fundamentals and see the palladium price advancing strongly, and every year their followers have been disappointed as the palladium price has mostly, in effect, followed the gold price on a downwards path. It’s not a logical pattern, but investor sentiment often does not follow logic. Palladium prices have risen so far this year – but again largely on the coattails of the gold price. Indeed the price is only up around 4%, hugely underperforming the other precious metals despite the seemingly much stronger fundamentals. Metals Focus recognises this in its analysis and forecasting again suggesting limited upside ahead despite a projected supply deficit of 1.35 million ounces in 2016!