You get the sense speaking with Trevor Raymond, Director of Research at the World Platinum Investment Council that the Platinum market is like a ticking time bomb – they are my words not his but during an interview prior to the release of the WPIC’s Platinum Quarterly Report for Q2, Trevor disclosed details about the supply side to the platinum market that bear further scrutiny.
The platinum market has been in deficit for five years now, a series of strikes and outages have consistently led to poor supply side numbers and 2015 was no different running a 520,000 ounce deficit. Investors looking for price increases have been thwarted by large, above-ground stocks that, while difficult to accurately quantify, are estimated by the WPIC as dwindling from some 4 million ounces to a current level of 2 million ounces over the period.
Still you may feel 2 million ounces should at that rate be enough to keep the market plentifully supplied for another five years, but — if you like — the low-hanging fruit has been plucked. Remaining inventory is believed to be priced much closer to current market levels and holders are going to want to see some significant upside before they part with it.
The WPIC has only been collecting and posting quarterly data for two years, so the latest report is only the eighth data point but already this is providing an unprecedented level of transparency and analysis to what has always been a rather opaque market.
Demand, on the other hand, remains robust, the WPIC reports. Rather than the diesel scandal posing a threat to automotive demand, the council believes automakers need diesel to achieve mandated and legally binding CO2 targets. Greater testing and monitoring will require more catalysts per vehicle and even the uptake of selective catalytic reduction (SCR) technology to reduce nitrous oxide emissions would result in only a 20% reduction in Pt use per unit, but — on the plus side — would enable automakers to continue with diesels while reducing nitrogen oxide emissions.
Renault, however, recently threw some doubt on that confident picture of future diesel demand. In a July meeting, Renault’s Chief Competitiveness Officer, Thierry Bollore, is quoted as saying the diesel investment outlook has dimmed significantly. A Fortune article quotes sources saying “He said we were now wondering whether diesel would survive, and that he wouldn’t have voiced such doubts even at the start of this year.
Tougher standards and testing methods will increase technology costs to the point where diesel is forced out of the market,” was reported to be his opinion. Renault made 1.6 million European deliveries last year, and more than 60% were diesels, but they are already pulling back on using diesels in their smallest cars and believe that will gradually creep up the range. Clearly whilst diesel demand in the short term is likely to remain strong it cannot be taken as read it will remain that way in the years ahead.
Jewelry and Industrial Demand
Jewelry demand in Q2 has been broadly flat with China going through a period of lower demand and India higher. This isn’t seen as likely to change significantly going forward, although stronger consumption growth in China would be likely to result in an uptick in demand there.
Industrial demand is more closely tied to global GDP growth, and while that is subdued this year — with little prospect of a significant upturn next year — it has remained positive and contributed to growing platinum demand. Of more significance, perhaps, is the oil price. Low prices have resulted in refinery operations being rationalized creating recycling supplies of platinum but new investments in other parts of the world have created new demand, contributing to quarterly surplus/deficit swings.
If, as expected, prices rise from the current $40-50/barrel range this year to $50-60 next year on the back of early signs of supply side discipline, then production from tight oil and gas formations could show growth after recent contractions and the resulting increase in demand to handle fracking intermediates could contribute to better platinum demand from the refining industry.
What Does This Mean for Metal Buyers?
Ironically, the platinum price is likely to be dictated by the same community that we started this review with — the investment sector. As we noted, investors are less likely to be releasing metal from the remaining inventory than was the case in the past, yet at the same time, the WPIC is making significant progress with multiasset class investors who have traditionally been, relatively speaking, heavy on gold but light on platinum.
There is a growing appreciation by this community, according to Raymond, that platinum provides not just precious metal exposure but an industrial element as well. The WPIC sees demand from this sector increasing, whether — like the chicken and the egg — that will be as a result of rising prices making it more attractive or whether the investor demand drives up the price, remains to be seen but the WPIC remains bullish for both.