Toyota's Troubles (And Nissan's, And Honda's) To Cut Into Platinum's Rise?

by Taras Berezowsky on April 27, 2011

Style:    Category: Automotive, Commodities, Exchange Traded Funds, Metal Prices, Non-ferrous Metals, Precious Metals, Supply & Demand

Earlier this week we mentioned that platinum is again on the rise, and prospects for the metal are looking good. However, in the wake of the supply chain nightmare the Japan tsunami caused the effects of which are still shaking markets should we be concerned that platinum demand will drastically decrease?

After all, platinum’s place in the auto industry is central to the metal’s industrial activity. Johnson Matthey, for example, supplies one in three auto catalysts globally, according to recent Bloomberg BusinessWeek report, and each one contains approximately 4 grams (0.13 troy ounces) of a PGM. But Japan’s big auto companies, accounting for a good chunk of global production, are in dire straits. Toyota reported that its March output in Japan dropped 62.7 percent year-on-year; Nissan’s fell 52.4 percent domestically, and Honda Motor’s fell 62.9 percent, according to Industry Week. These numbers caused S&P to drop its rating for these companies, as well as for three big suppliers, Aisin Seiki, Denso, and Toyota Industries. Toyota doesn’t expect for things to turn around until December at the earliest, potentially clouding the global auto market’s outlook.

But the situation for the three big Japanese auto companies may not cut into platinum demand as far as we think. Barclays estimated that the Toyota, Honda, Nissan plant closures cut demand for platinum-group metals by about 90,000 ounces so far, equal to about 0.5 percent of combined annual usage, according to Bloomberg. Other car makers should take up the slack — J.D. Power Automotive Forecasting predicted global car and truck sales to be up 6.1 percent this year, to 76.7 million units. Besides, “consumption [of platinum] will be deferred rather than lost, the bank said in a report April 15. Leon Esterhuizen of RBC Capital Markets echoed this sentiment. “Impala [Platinum] said recently that all of its Japanese clients continue to take metal even though they offered them the opportunity not to take metal right now, he said in a recent podcast. “That sort of tells you that the people who are fundamentally involved in this market understand that there is probably going to be a shortage of metal – even if you’re not using it right now, you better take it and you better start building stockpiles.”

On the supply side, then, fears of shortages for the rest of the year remain. Platinum miners are digging deeper than ever to reach the reserves; GFMS Ltd. estimates companies are able to extract 3.83 grams of the metal from every ton of rock. Production in South Africa is slated to decrease 8.4 percent since 2006, and catalytic converter demand will increase 64 percent this year over 2009, Barclays says. Finally, ETF asset flows are red-hot for platinum. As of April 26, ETF Securities’ physical holdings of platinum, for example, increased 5.6 percent since the beginning of the month, up to 487,168 ounces (right around 15 tons), according to their daily flow data.

With bullish analysts calling for platinum to increase to $2100 per ounce by year’s end, and Bloomberg’s survey predicting a 14-percent rally to a three-year high of $2,050 an ounce by Dec. 31 (it hovers at around $1835 these days), the fundamentals appear sound enough for us to say the $2,000 benchmark sounds about right. The only thing that could pull the price back from that benchmark enough might be the hit that inflation could put on Chinese consumers, forcing Chinese auto sales to be a bit less robust in the second half of this year. Otherwise, look for platinum to keep its high profile for a bit longer.

–Taras Berezowsky

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