LAWRIE WILLIAMS: Platinum supply may move into deficit this year
Platinum has probably been vying with silver as the worst performing precious metal over the past few years, but the latest pgm specialist Johnson Matthey analysis paints a more positive picture for the metal’s future. It has been hugely overshadowed on the pricing front by its much more volatile sister metal, palladium, over which it has traditionally held a strong price advantage. However the platinum price premium over palladium has reversed in the past couple of years which have seen the latter metal’s price surge dramatically on what, on the face of things, appear to be much stronger supply/demand fundamentals.
In short, palladium became the go-to catalytic metal of choice for gasoline (petrol) fuelled engines, due to its historic lower price and in the light vehicle market gasoline is the dominant fuel for internal combustion engine vehicles. Platinum had retained its dominance in the diesel sector, but the VW scandal, and the targeting of diesel as the more dangerous environmental polluter has reduced the mass market end in this sector and platinum had appeared to be heading for several years of production surpluses, with the price suffering accordingly. Consequently the palladium price surged ahead of that of platinum at end-September2017 and hasn’t looked back since then with analysts predicting big platinum production surpluses and palladium deficits.
However the latest analysis from Johnson Matthey in its just released PGM Market Report, suggests platinum supply could also move into deficit in the current year. The report notes that a surge in investment buying and higher automotive consumption (primarily from an ever-growing diesel truck market) will underpin a 9% demand gain for platinum in 2019, offsetting weakness in the Chinese platinum jewellery market, where platinum faces increased competition from karat gold jewellery.
Johnson Matthey reckons overall automotive demand for platinum will rise by 3% this year, primarily due to greater platinum use on trucks. In China, the company states, “platinum consumption on heavy duty vehicles will increase sharply, with strict China 6 emissions legislation due to be implemented in some provinces and cities starting in July 2019. The new regulations will apply nationwide from July 2020, while India will also introduce strict emissions regulations for trucks next year.”
South Africa is the world’s dominant platinum producer and output there has remained pretty flat despite ongoing problems with prospective strikes and inter-union rivalries. Johnson Matthey does see production there rising marginally this year, provided that producers can clear processing backlogs but notes that there is also some downside risk due to the potential for disruption from electricity shortages and/or strikes.
On factors which have been influencing the global supply/demand situation, Alison Cowley, Principal Analyst at Johnson Matthey, comments: “Between mid 2018 and early 2019, the platinum price traded close to ten year lows while palladium set a series of all-time records. Some investors now think that platinum is under-priced, given the improving outlook for automotive demand (not so much in numbers of units but in terms of regulatory changes requiring additional loading- Ed) and uncertainties over supply. This led to a dramatic turnaround in sentiment during the first quarter of 2019, when investors bought nearly 700,000 ounces of platinum Exchange Traded Funds (ETFs). This seems to be net new investment, rather than investors switching out of palladium into platinum.”
Meanwhile Johnson Matthey still also expect the palladium market deficit to widen as it sees autocatalyst demand climbing 9% - again largely due to regulatory requirements. However, car sales actually seem to be falling sharply worldwide and perhaps the analysts have not been taking this sufficiently into account. The metal price had been flying high reaching a record $1,600 an ounce only a few weeks ago, but last week the price plunged falling below that of gold on Thursday for the first time since January, although it bounced back sharply on Friday, restoring its premium over gold, but has come back in price again this morning. Historically the palladium price has trailed that of gold and platinum quite substantially, but all that has changed in the past couple of years as global supply has been unable to keep up with demand, although any deficit has been met by the liquidation of above-ground stocks. But the ability for this situation to continue is becoming increasingly limited.
Thus Johnson Matthey analysts see the palladium supply deficit widening ‘significantly’ this year, but again may be underestimating the fall in sales number for cars worldwide and the ever increasing market share of electric driven vehicles which require less palladium (hybrids) or none at all (true electric-powered vehicles).
Rupen Raithatha, Market Research Director at Johnson Matthey, comments: “ETF investors redeemed over 2.2 million oz of palladium holdings during the last four years. This helped to support market liquidity during a period of exceptional growth in automotive demand. However, persistent market deficits have had a real impact on the price, which reached a record high of over $1,600/oz in March 2019. Despite these high prices, ETF selling dried up in the first quarter of 2019, but we think there is still some potential for profit-taking this year.”
Johnson Matthey thus sees palladium use in autocatalysts rising in 2019. China, currently the world’s largest auto market, is introducing its new more stringent emissions legislation which will be enforced nationally in 2020, but some provinces and cities will introduce the new standards in July this year, under the ‘Blue Sky Protection Plan’. This will result in a step change in palladium loadings on Chinese cars. More stringent emissions controls are also being introduced in Europe and the Americas, which will also see palladium loadings rise in exhaust catalysts, although, as we have noted above, this is all being mitigated somewhat by a fall in automobile sales around the world.
On European autocatalyst demand, Margery Ryan, Principal Automotive Analyst at Johnson Matthey, added: “Euro 6d legislation is having a significant impact on the palladium market. Vehicles are being tested under a wider range of driving conditions, making emissions control more challenging. Exhaust after-treatment systems are becoming more complex and automakers are adding more palladium to meet the new requirements.”
So altogether a positive outlook for both platinum and palladium from Johnson Matthey, which is probably the world leader in autocatalyst supply and consequent processing of PGMs to meet this demand. So to an extent this latest analytical report may represent wishful thinking on its own position. However its analytical capabilities are enormous so the views presented should be taken seriously by the markets.
The Johnson Matthey analytical conclusions do not entirely agree with those of the World Platinum Investment Council (WPIC) but the supply/demand situation for both metals remains fluid. The latest WPIC quarterly report makes many of the same comments on platinum as the Johnson Matthey one regarding increased investment demand and, indirectly, suggests that European diesel powered vehicle sales may pick up due to manufacturer success in cutting down diesel engine pollutants to legislative acceptable levels. However, despite seeing an overall increase in platinum demand in 2019 at double the rate of possible increased supply, it still sees the platinum supply/demand balance as being in surplus at the year end, although reducing. It also notes, however, a similar assessment of potential supply interruptions from South Africa.
So, all in all the latest assessments of the platinum and palladium markets suggest an improvement in platinum’s position and perhaps little change in palladium’s. But markets are largely driven by perception and sentiment and whether improved fundamentals for platinum in particular will lead to a price recovery remains obscure. We think probably they will, at least to some extent, while there may be little change in the palladium price premium over its sister metal which again raises the threat of substitution in autocatalyst systems. We assume manufacturers are working on this and the likelihood of it happening become more and more likely if the current price differential between the two metals persists.
Metals Focus in its pgm report out today tends to agree with WPIC and is forecasting a continuing supply surplus for platinum and a continuing deficit for palladium and sees thje latter outperforming the former again this year. However it does note that the perception for platinum is less bearish than it has been but even so it sees unsupportive fundamentals still weighing on the metal, which explains a forecast for a 1% dip for platinum’s annual average price this year to $875.
Conversely In spite of short-term headwinds (such as lacklustre car sales in China and the US, and concerns over the potential for substitution losses in light vehicles), Metals Focus anticipates palladium to realise a physical deficit for the foreseeable future. As such, for 2019, Metals Focus believes that professional investors will eventually return to palladium, with prices forecast to surge by 45% y/y to an annual average of $1,490. This is well below its recent peak but as an average suggests a positive performance comfortably above its current spot level.