Commodities | Nov 22 2012
– Supply disruptions a key driver of PGMs
– Auto industry a primary driver of demand
– Price forecasts updated
By Chris Shaw
Platinum and palladium prices have been broadly range-bound over the past 12 months, a trend which implies the market has both solid underlying demand and overhead supply.
ScotiaMocatta expects this trend will continue until market fundamentals tighten. This may take some time as the short-term demand outlook is not bullish given the amount of capacity built in 2010 and 2011, though the analysts note the supply side is turning more positive for prices given labour unrest in South Africa.
The labour issues in South Africa have boosted fund interest in the platinum group metals (PGMs), something ScotiaMocatta suggests increases the risk of stale long positions being liquidated in the short-term.
Investment interest in platinum has been good, ScotiaMocatta noting ETF holdings of the metal are at near record levels at present as funds have been attracted to the market via the supply issues stemming from labour disputes.
Looking into 2013, ScotiaMocatta sees a better overall economic outlook as supportive for PGM prices, while a further positive in the group's view is the potential for the world's two largest auto markets to grow faster next year. This is significant as the other main driver of demand for PGMs, the jewellery sector, tends to be price elastic, whereas industry demand is largely inelastic.
On the supply side, the production lost due to industrial disputes has limited any market surpluses to levels where investors have a better chance of absorbing any excess material. The ongoing combination of a unhappy miners, safety stoppages, high costs and a strong rand continue to squeeze margins for producers, leading ScotiaMocatta to suggest further disputes next year and beyond.
With funds long the platinum market despite limited potential for any significant jump in demand in the year ahead, ScotiaMocatta cautions there remains risk of liquidation selling in the absence of any further supply disruptions in the market.
Given the expectation of further disruptions ScotiaMocatta remains bullish on platinum, especially given the long-term demand outlook from the auto sector is also positive. Short-term prices are forecast to remain range bound between US$1,400-$1,700 per ounce, with prices only likely to hold above US$1,900 per ounce if the market experienced lasting supply disruptions.
In contrast to platinum, investor demand for palladium has been surprisingly weak in ScotiaMocatta's view, in part because the Japanese tsunami and earthquake had a significant negative impact on the auto industry. This impacts palladium more given the auto sector accounts for just over 70% of total palladium demand.
Russian sales from stockpiles remain key on the supply side of the palladium market, with ScotiaMocatta expecting sales to continue but at a slower pace than in recent years. Any sign such stockpiles are dwindling would be significantly bullish for the palladium market in the analysts' view.
Stronger growth in China should be a positive for the demand side of the palladium market in 2013, underpinning ScotiaMocatta's forecasts for prices to range between US$500-$725 per ounce in the year ahead. Any further supply disruptions could push prices towards the US$850 per ounce level.
While labour disputes remain a key driver for the PGMs, the confirmation by Anglo Platinum last week that workers were returning leads Standard Bank to suggest some of the short-term production and supply risk in the platinum market has now been resolved.
As a result, the bank estimates support for the metal lies close to US$1,500 per ounce at present. This forecast is based on current futures market positioning, a positive view of the gold price and the expectation jewellery demand will improve at lower platinum prices.
For 2012 Standard Bank estimates the platinum market will be in deficit of around 355,000 ounces, falling to around 136,000 ounces in 2013. This is a more aggressive market estimate than that of Nomura Securities, which expects a balanced market for 2013 and a deficit in 2014.
Despite this expected market deficit, Standard Bank suggests demand is unlikely to be strong enough to drive prices higher on a sustainable basis. As evidence of this, the bank points out demand via auto sales has faded relative to both last year and the start of this year. With this leaving jewellery demand as the main area of support for platinum, Standard Bank continues to see a tactical trading range for platinum of US$1,500-$1,600 per ounce.
Nomura Securities is more bullish on the price outlook, seeing a possible peak in price of US$1,950 per ounce over the next six months. As this implies potentially substantial increases to earnings for platinum plays, the broker has upgraded stocks in the sector. Australian-listed Aquarius Platinum ((AQP)) is one beneficiary, Nomura upgrading the stock to a Buy rating.
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