Grace Mahlomotja
PLATINUM investors have experienced a torrid time over the past few years due to the twin issues of lower prices and escalating labour unrest impacting platinum production.
During 2014, South African and global platinum production was hard hit by the five-month industrial action that resulted in 40 percent of South Africa’s potential platinum group metal supply not being realised. As a result of the labour unrest the big three platinum companies; Anglo Platinum (Amplats), Impala Platinum and Lonmin collectively lost about 1.33 million ounces (Moz) of production.
According to the Johnson Matthey analysis, this equates to about 38.5 percent of South Africa’s 2014 production and 26 percent of global production. South Africa and Zimbabwe dominate the world’s primary supply of platinum, together accounting for 54 percent of global platinum supply.
Interestingly, platinum recycling is now becoming a major source of supply, currently contributing 31 percent of global supply
Johnson Matthey also reported that platinum demand increased by 10 percent to 8.75 Moz in 2013, while in 2014 demand fell by 2.8 percent to 8.51 Moz. Despite this year-on-year fall in demand, in the long term, platinum demand should be supported by a diverse industrial and consumer base.
Figure 2 illustrates the demand sectors: vehicle catalysts, jewellery, industrial use and investments (for example, exchange traded funds). Vehicle catalytic converters remain the biggest demand segment for platinum contributing 40 percent to gross demand in 2014.
Despite concerns about the world economic growth, car sales have remained fairly robust rising 3.4 percent year-on-year. This equates to an increase of 2.7 million vehicles, resulting in a total of 81.6 million vehicles in 2014. In terms of individual markets, China led the way followed by the US and EU growing at 8 percent, 6 percent and 7 percent, respectively (Figure 3).
China’s growth in car sales is being driven by second and third tier cities as first tier cities like Beijing and Shanghai grapple with pollution control. In US last year annual growth rate in vehicle sales was hit by a weak start due to the adverse weather, but by year-end sales rebounded.
While in the EU (the region accounts for about 40 percent of vehicle catalyst demand) vehicle sales growth ticked up but the increase was largely reliant on two markets, namely the UK and Spain. The laggards in car sales were emerging markets (Figure 4).
In particular, Thailand’s car sales were negatively affected by political unrest and a weakening economy and Russia continues to struggle in the face of political and economic problems. In Brazil the outlook remains subdued with car sales continuing to disappoint.
Vehicle demand in India continues to suffer from the ongoing withdrawal of diesel subsidies by the government, which will, as a result, improve the competitiveness of petrol engines. The decline in emerging market vehicle sales remains a demand concern for the platinum industry.
However, the low oil prices could spur vehicle purchases as running costs of car ownership reduce.
Jewellery represents the second largest demand segment for platinum contributing 35 percent of gross demand in 2014. China is the largest market for platinum jewellery consuming about 70 percent while Japan accounts for 10 percent, Europe 7 percent, the US 7 percent and India 6 percent.
India has been the fastest growing market for platinum jewellery recently, growing by 36 percent in 2012, 29 percent in 2013 and 25 percent in 2014 according to Johnson Matthey.
Compared to the universal appeal of gold, the platinum jewellery market in India is niche, with platinum pitched as “premium jewellery” with respect to gold especially among the young, urban clientele. Furthermore, India is the least price sensitive of the platinum jewellery markets as buyers see the metal as a store of value.
A premium price for platinum jewellery over gold helps to maintain platinum’s attraction.
Sales in India tend to be robust around the major festivals and wedding seasons. A similar trend in China is followed, as sales tend to be especially strong in the run up to the Lunar New Year. Platinum jewellery demand is forecast to rise in 2015, as Chinese demand remains resilient and growth in Indian demand increases.
The listing of two South African, rand-denominated, platinum ETFs has resulted in total investment demand increasing from 1.7 Moz in April 2013 to 2.5 Moz by end of 2014.
Towards the end of last year, investors liquidated some of their positions given the combination of the platinum price decline and weak sentiment. Currently, investors are most likely to hold their positions given that they have built these up when the platinum price was higher.
In South Africa, although a three-year labour agreement has been signed with the unions, we caution that in 2015 platinum mining production could be constrained in the near term due to electricity constraints, potential but perhaps limited labour industrial action and possible restructuring within the industry.
The restructuring of the platinum mines continues as many of the existing mines are high-cost, deep-level mines. A review of mining operations by Amplats and Impala Platinum could see some high-cost operations closed with the industry gradually becoming more mechanised.
Taking a longer term view of the industry, global vehicle demand is expected to grow fuelling demand for these precious metals. This view is also reinforced by tighter global emission controls implying higher metal loadings.
On balance, the 2015 platinum market is forecast to remain in deficit with respect to mine production. However, this deficit should continue to be serviced by the drawdown of above ground stocks. The above ground stock assumptions range between 1 Moz to 4 Moz. Recently, two of the large producers have forecast above ground stocks at around 2 Moz.
Given the loss in production of 1.33 Moz last year and a further production deficit this year, above ground stocks continue to deplete. This depletion of above ground stock is healthy, in the long term, for the platinum industry if one assumes acceleration in emerging market demand for cars and jewellery as gross domestic product per capita increases.
These developments, coupled with a shake out of the platinum mining industry could lead to a perfect storm for platinum investors as platinum prices rise in line with a more efficient mining industry.
* The information used to compile the "Big Four Vehicles..." and "Key emerging market vehicles..." figures were obtained from National car data by Macquarie Research, January 2015.
Grace Mahlomotja, a portfolio manager at Ashburton Investments