Platinum

Platinum market fundamentals and trends

Platinum is both a precious and industrial metal used in catalytic converters, jewelry, electronics, chemical/petroleum refining and dental/medical applications as well as in bullion coins and bars.  Because of low annual production levels and a lack of effective substitutes in many applications, platinum is scarce and highly valuable.  Market fundamentals are positive for platinum as demand continues to grow, while supply faces serious constraints arising from high geopolitical risk, labour strife and systemic operating cost issues in primary producer countries.  The combination of rising demand and declining production caused the platinum market to fall into a deficit position of 375,000 ounces in 2012, based on data from Johnson Matthey.

Platinum supply

Only 177 tonnes (5,718,000 ounces) of platinum were produced in 2012, with 92% of that production originating in South Africa, Russia and Zimbabwe.  South African production, which accounted for 72% of 2012 platinum production, has declined 23% since 2006 due to labour unrest and rising operating costs, especially associated with wages and electricity prices.  The CPM Group estimates that PGM cash costs in South Africa have risen at a compounded annual rate of 14.5% since 2000 and labour unions are demanding large wage increases this year.  The majority of South African platinum operations are deep underground mines that involve labour-intensive thin seam mining that cannot be mechanized and labour costs are estimated to be 50% of total costs by the CPM Group.  With mining companies already having seen profit margins compressed by rising costs, they cannot afford the large increase in wages that South African mining unions are demanding.  Therefore, South African labour unrest continues along with the potential for strikes and other work stoppages that will negatively impact production.

Any shortfalls in South African production are unlikely to be offset by production from Russia or Zimbabwe.  Russian platinum production has been declining since 2003 due to lower platinum grades being mined at Norilsk and Zimbabwe is effectively nationalizing platinum mines by forcing companies to cede a 51% interest to the state empowerment fund.

Secondary supply of platinum from recycling contributed 1,330,000 ounces in 2012, down 8.9% from 2011 according to the CPM Group.  Platinum from autocatalyst recycling peaked in 2010 and has been trending lower since due to the increasing substitution of palladium for platinum that started around the turn of the century.

Platinum production from South Africa and Russia has been declining since 2006:

Platinum demand

Platinum demand has risen at a compounded annual rate of 4.1% since 1982, based on data from the CPM Group.  Use in autocatalysts continues to be the largest demand source, accounting for 43% of total demand in 2012, but down from 54% in 2007.  Autocatalyst manufacturers have been replacing platinum in catalytic converters with palladium due to its lower cost since 1995.

The majority of catalytic converters for gasoline engines now use palladium, but platinum remains the dominant PGM in catalytic converters for diesel engines because it is less prone to sulphur poisoning and oxidation at low temperatures.  However, the CPM Group estimates that palladium now accounts for about one-third of the PGMs loaded on a diesel catalyst, up from only 5% in 2005.   This substitution combined with weak economic conditions in Europe, the largest market for diesel cars, has weighed on platinum demand over the past five years.

Some of the demand weakness is expected to be offset by higher platinum demand for heavy duty vehicles, which faced stricter emission standards starting in January 2013.  The negative impact of European auto sales on platinum demand is expected to be a temporary phenomenon and we expect platinum demand to increase as European economies recover and as substitution of palladium slows due to technological limitations and higher palladium prices.

Platinum jewelry is also a source of demand growth due to increasing popularity in China and accounts for 31% of total demand.  Another increasingly important source of demand is investment demand, with platinum-backed Electronic Traded Funds now holding almost 2 million ounces of platinum.

Autocatalyst demand is expected to rise due to increasing global environmental standards & strong auto demand from Brazil, Russia, India and China.

Platinum trends

• Platinum demand has been growing at an average rate of 4.4% per year since 1982
• Primary platinum supply peaked in 2006 and has been declining at an avg. rate of 2.6% per year since
• Primary platinum supply declined in 2012 by 13% to the lowest level in 12 years
• Substantial supply reduction due to labour strife & high production costs in South Africa moved platinum market into a deficit equal to 10% of mining supply over the course of 2012

Platinum Global Gross Demand (Moz)

As demand grows, platinum markets could continue to face deficit positions as supply will likely continue to be constrained by labour stoppages and a lack of capital reinvestment; at the current price of platinum, approximately 70% of PGM production is failing to recover all-in cash costs according to Thomson Reuters GFMS cost data.

New styles of platinum mines in South Africa that have thicker mineralized seams that are amenable to mechanized mining could boost production in the future, but the long-term issues that result from 92% of supply originating from countries with high geopolitical risk will not be resolved unless new sources of supply in mining-friendly jurisdictions are developed.

Sources:
Johnson Matthey Platinum 2013 (http://bit.ly/15H8G41)
CPM Group Platinum Group Metals Yearbook 2012
SIAM, China Automotive Information Network, AEB, ANAFAVEA, and CPM Group
Johnson Matthey Market Data Table (http://bit.ly/V7pnOo)