Material Matters: Platinum Week In London, Zinc Oversold, Gold Forecasts Lifted

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By Chris Shaw

This week is Platinum Week in London and as UBS notes, during the week of meetings and presentations platinum group metals (PGM) prices tend to appreciate as the market expects a positive market assessment from specialty chemicals group Johnson Matthey.

According to UBS, the Johnson Matthey presentation this year showed the platinum market moved from a deficit of 220,000 ounces in 2008 to a surplus of 285,000 ounces in 2009, reflecting weaker demand.

But the forward outlook is more important for prices in UBS's view and here the broker notes Johnson Matthey expects the market to return to closer to balance in 2010 as demand improves by more than the growth in supply. The risk, according to Johnson Matthey, is the market moves into deficit – something it sees as possible if sales don't emerge from Russian state stockpiles.

Both mine and scrap supplies are forecast to grow this year, while Johnson Matthey expects auto demand (platinum is used in catalytic converters) to recover. UBS notes the most price-elastic component of the PGM market is Chinese jewellery demand and this is expected to fall this year thanks to high prices.

UBS notes volumes are currently down in the jewellery market, which implies greater supply in the Chinese system given there appears to have been some restocking last year. The broker suggests this could mean a weaker demand response even if prices were to decline from current levels.

In terms of price forecasts, Johnson Matthey expects platinum to trade between US$1,600-$2,000 per ounce over the next six months, while palladium is forecast to trade between US$475-$700 per ounce.

In the gold market, GSJB Were has raised its price forecasts for the metal, reflecting record levels of investment and retail demand from European investors in particular. To factor this in the broker has lifted its base price assumption for gold to US$1,150 per ounce from US$1,090 previously, while is trading range for the rest of this year moves to US$1,125-$1,300 per ounce from US$1,075-$1,200 per ounce previously.

Forecasts in subsequent years have also been lifted, GSJB Were now expecting annual average prices of US$1,203 per ounce in 2011, up from US$1,143, and US$1,252 per ounce in 2012 against $1,190 previously.

In 2013, GSJB Were expects an annual average price of US$1,303 per ounce against $1,238 previously, while its 2014 forecast has increased to US$1,356 per ounce from $1,289. The changes mean some adjustments to earnings estimates for the Australian gold stocks in the broker's database, though price targets and ratings are unchanged.

GSJB Were's preferred gold stocks are Newcrest ((NCM)) among the majors and Kingsgate Consolidated ((KCN)) and Avoca Resources ((AVO)) among the smaller cap end of the gold market. All three companies are rated as Buys.

Zinc has not escaped the selling pressure in commodity markets of late, being hit hard this week as investors continue to exhibit nerves over the outlook for growth in both Europe and China. But Barclays Capital suggests the selling, with zinc prices falling by at least 7% at the start of the week, is an overreaction to potential future risks for consumption growth.

Barclays points out the latest International Lead and Zinc Study Group figures showed continued strong momentum in zinc demand recovery. Global consumption rose by almost 25% in March in year-on-year terms against a 16% increase in refined production in year-on-year terms.

Commonwealth Bank notes the zinc market was in a large surplus in 2009 of 433,000 tonnes, with a surplus expected again this year. Longer term however, the bank expects the zinc market will tighten. Its price forecasts reflect this as it expects zinc prices of US104c per pound, US98c and US100c for the June, September and December quarters.

In 2011 Commonwealth Bank is forecasting zinc prices of US101c, US104c, US118c and US124c per pound for the March, June, September and December quarters. From a technical perspective MF Global suggests with the long-term up-channel having been broken badly prices have some work to do if the break is to be salvaged.

The most likely outcome, according to MF Global, is the formation of a much lower trading range, likely between US$1,800 and US$2,200 per tonne. From a technical viewpoint it sees support at US$1840 per tonne and resistance at US$2,200 per tonne. These equate to prices of around US82c per pound and US98c per pound.

In the natural gas market, Barclays Capital suggests there are signs power demand in the US is recovering as industrial production (IP) picks up. This is important as the power sector has been essentially the sole source of gas consumption growth over the past decade.

As Barclays notes, industrial consumption led the decline in power demand and must also lead any recovery. This should happen as Barclays is forecasting IP growth in the US of 6.1% this year, which alone should be enough to boost power consumption by 1.5%.

This forecast is in contrast to that expected by power sector companies in the US, Barclays noting these companies are anticipating demand growth of something between 0-1% this year. Assuming the forecasts of Barclays prove to be closer to the mark it suggests some potential for positive surprise with respect to demand for natural gas in the US this year.

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