Eastern Platinum Ltd (ELR)

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Johnson Matthey bullish on platinum, palladium, sees deficits

http://www.miningweekly.com/article/platinum-palladium-outlook-bullish-deficits-on-way-johnson-matthey-2009-11-17

By: Martin Creamer
17th November 2009

JOHANNESBURG (miningweekly.com) – Platinum researcher Johnson Matthey on Tuesday presented a bullish outlook for both platinum and palladium and spoke of deficits being on the way in both metals.

Johnson Matthey precious metals marketing director Mark Bedford told Mining Weekly Online that both the autocatalyst and industrial markets were poised to improve in 2010 and forecast a platinum price of from $1 280/oz and $1 550/oz for the next six months.

He conceded that the company's $390/oz palladium price forecast was already close to the point of being overtaken.

Johnson Matthey principal marketing analyst Alison Cowley added that, although there was a potential for supply to increase, that potential was relatively limited.

"It's reasonable to say that, going into 2010, we would certainly expect the surplus to be eaten up pretty quickly, and I think we might well see a platinum market that's in deficit next year," Cowley told Mining Weekly Online.

Bedford said that there was a great deal of investor sentiment in favour of palladium, because of the expectation that Russian State stocks would diminish to a minimum in the next two to five years.

"When that happens, it looks like the palladium market is going to be in fundamental deficit and, for that reason, many people are very bullish about palladium," he told Mining Weekly Online.

On possible supply-side surprises on the upside, Cowley told Mining Weekly Online: "In the short term, you tend not to get upside supply surprises, because the lead time for new projects coming into production is typically very long."

Bedford expected global vehicle production – which was likely to fall to 57-million units this year – to increase in 2010, possibly to 65-million units, which would be positive for platinum-group metals (PGMs) demand.

"On the balance of probabilities, we will be looking at a modest platinum deficit in 2010, given what we can see on the supply side and the demand side. Besides more autocat demand, we can see some of the industrial demand coming back as well," Bedford told Mining Weekly Online.

This year's industrial demand was down by almost as much as auto demand, partly owing to the recession, but also because of market cyclicality.

"We can see some of that cyclical demand coming back as well. We have put our bottom platinum price forecast at $1 280/oz and top forecast at $1 550/oz for the next six months," he told Mining Weekly Online.

On Johnson Matthey's $390/oz palladium price forecast already being over taken by events, Bedford said: "That's the hazard of setting a price forecast three weeks ago."

Johnson Matthey set a price range of from $290/oz to $390/oz for palladium, which was already rising beyond $370/oz while Johnson Matthey was in the process of delivering its Platinum 2009 Interim Review globally to media and analysts.

"That suggests to us that we were right to be bullish three weeks ago, but things have moved even faster than we expected," Bedford conceded.

On the prospect of Russian stocks depleting, he said: "When that happens, it looks like the palladium market is going to be in fundamental deficit and, for that reason, many people are very bullish about palladium.

"On the other hand, there are a lot of people who just still regard palladium as being cheap. It was $1 000/oz once, and it could be $1 000/oz again, and I still believe that there are some investors who take that view," he added.

On supply prospects, Cowley said that there was potential for pipeline metal supplies to increase in the next six months, given that platinum miners Lonmin and Anglo Platinum had pipeline stocks of metal that were above historically normal levels.

"There are also a number of new mines that are ramping up to full production. For example, there is the Blue Ridge mine, which has been taken over by Aquarius. There is Platmin's Pilanesberg mine, and there is Platinum Australia's Smokey Hills mine.

"It's fair to say that the industry still faces a very tough task in bringing costs under control and reducing costs. This year, we have seen wage increases that have typically run above 10%.

"The industry is facing increases in electricity prices and, although some of the other input prices have come down, I think it's still going to be very tough to bring costs down, although having said that, some of the mines have done a good job so far in 2009 of bringing down unit costs, which is positive for the industry going forward. But there's a lot more work that needs to be done on that aspect, " she added.

"If you look into the immediate future, demand in the major industrial areas has been very depressed this year. Although we are not expecting a rapid recovery, we are certainly expecting to see some increasing demand next year," Cowley said.

2009 FORECAST

Johnson Matthey said that the platinum market was poised to move into a small surplus of 140 000 oz in 2009.

While the amount of ore mined and the weight of platinum produced in concentrate were set to fall this year, changes in pipeline stocks in South Africa and the sale of some additional refined metal meant that the amount of platinum supplied to the market would actually increase very slightly.

By contrast, the overall net 2009 demand for platinum was set to decrease by 4,4%.

The slowdown of the automotive industry would be the major negative change, with gross demand falling by around one third and industrial demand also decreasing.

The fall in the platinum price had, however, resulted in a very positive jewellery demand, which was expected to rise 80% in 2009, with physical investment demand also up by 15%.

Although the platinum price remained some distance below the first half of 2008, it had risen substantially from the low point reached at the end of the last year, supply rising from 4,945-million ounces in 2008 to 6,055-million ounces in 2009 and demand was expected to decline from 6,185-million ounces in 2008 to 5,915-million ounces in 2009.

Overall, the platinum market was expected to move from a deficit of 240 000 oz in 2008 to a small surplus of 140 000 oz in 2009.

JEWELLERY

Johnson Matthey said that global net jewellery demand for platinum was set to climb to 2,45-million ounces in 2009, despite net European and North American jewellery demand falling.

In Japan, lower prices had, however, reduced recycling flows, which would cause net demand to climb.

In China, the metal price had continued to encourage demand from the jewellery sector, which should leap to a record level of 1,75-million ounces in 2009, owing to strong consumer purchasing and hefty restocking throughout the industry.

CHINA

The lower price of platinum compared with the first half of 2008 has had a hugely positive effect on net Chinese jewellery demand, which was expected to rise to a record 1,75-million ounces this year.

Lower prices provided retailers and wholesalers with the opportunity to replenish and expand stocks, increasing platinum's share of counter space where it replaced white gold jewellery.

Attractive profit margins also encouraged new retailers and new manufacturers into this sector.

"This widespread restocking drove a dizzying increase in demand in the first half of 2009 in particular," the company said.

Continued economic growth and a fall in the retail price of platinum jewellery also boosted the weight of platinum sold to consumers. Together, these trends increased net platinum demand in the first half of 2009 to over one million ounces in China alone.

Although the platinum price had risen since the start of 2009, retail prices remained some way below the levels of late 2008, suggesting that consumer purchasing should stay close to its current elevated level. However, with restocking essentially completed, net demand for the second half of the year was expected to be closer to 700 000 oz.

EUROPE

Purchases of platinum by the European jewellery and watch industries were forecast to decrease by 15 000 oz to an estimated 185 000 oz this year. The European luxury jewellery manufacturers had struggled with the effects of the financial crisis and demand would fall as a result.

However, robust bridal market platinum demand was likely to be steady year-on-year. Platinum use in the Swiss watch industry would drop owing to lower watch production and careful stock control by manufacturers and retailers.

JAPAN

Net Japanese platinum jewellery demand was expected to climb by 255 000 oz to 310 000 oz in 2009.

The lower metal price has reduced the incentive for consumers to cash in second-hand jewellery and the rate of recycling of jewellery scrap would thus fall sharply. Gross demand rose by 10 000 oz to 540 000 oz as retailers saw improved sales of platinum jewellery. Production of platinum chain for sale in Japan and for export to China also increased.

NORTH AMERICA

The jewellery market in North America had struggled in worsening economic conditions. Net platinum demand was forecast to fall by more than one quarter this year to 140 000 oz as consumers' disposable income had shrunk and retailers reduced working stocks.

JEWELLERY OUTLOOK

Johnson Matthey said that platinum demand from the jewellery industry was likely to soften somewhat in 2010.

The very strong levels of platinum demand in China since the last quarter of 2008 had been partly due to a high degree of stock building, which was unlikely to be repeated in 2010.

However, unless the retail price of platinum jewellery rose sharply, any decrease in consumer purchasing or any increase in the use of recycled metal should be limited.

With the price of platinum well off the peak levels of 2008, an upturn in the world economy in 2010 was likely to lead to a slight increase in demand in other markets.

PALLADIUM JEWELLERY

Net jewellery-sector demand for palladium was expected to climb to a global total of 920 000 oz in 2009.

The economic slowdown had helped palladium gain a share of the market for men's wedding bands in North America while the approval of a palladium hallmark in the UK should boost European demand.

In China, manufacturing volumes would change little but a fall in the recycling of old jewellery stock meant that net demand was set to rise.

Net Chinese palladium jewellery demand was expected to rise from 650 000 oz in 2008 to 680 000 oz this year.

Although some manufacturers had abandoned palladium production in order to take advantage of the higher margins offered by platinum jewellery, others had captured this market share and overall production volumes would be little different from 2008 levels.

The recycling of palladium jewellery was expected to fall by 40 000 oz as little old stock remained and that decline meant that net palladium demand should climb by 30 000 oz.



Edited by: Creamer Media Reporter