Platinum market deficit to hit 844,000oz in 2013 - HSBC
According to the bank, the platinum market is likely to record a significant deficit in 2013 but, this does not necessarily imply higher prices.
Posted: Saturday , 15 Jun 2013
GRONINGEN (MINEWEB) -
The platinum market is likely to hit a record deficit of 844,000 ounces in 2013, HSBC says, as supply shrinks and demand, especially from ETFs picks up.
But, despite this favourable fundamental picture, the bank has cut its average price forecasts for this year and next to $1,580/oz and $1,725/oz from $1,710/oz and $1,800/oz respectively.
The reason for this, the bank writes, is that “Platinum has been more influenced than we had anticipated by the sharp swings in the gold price and this will pull average prices lower for this year and next.”
Nonetheless, the fundamental picture for platinum remains engaging.
On the supply side, HSBC is forecasting total global production of c5.646moz for 2013, with South Africa by far the biggest producer.
This, it says, is a decline of 6.3% from its previous forecast, and is nearly flat on 2012 levels. In other words, the group expects virtually no mine output growth for the year.
Citing the bank’s metals and mining analyst, Emma Townshend, HSBC writes that much of the reason for this is that the chances of further strike action in the South African PGM minefields later this year are high.
“Miner’s unions are demanding double-digit pay increases, which are well above producer offers. Low prices mean that producers are not in a financial position to meet union pay demands and some producers such as Amplats have built stocks in anticipation of production interruptions, due to strike action.”
While the HSBC report came out ahead of the release of a draft action plan signed by government, business and labour in South Africa, committing to a number of initiatives to try and improve the performance of the industry the point stands.
See also: Did South African mining just grow up?
The bank is rightfully wary of further industrial unrest in the country as wage negotiations are likely to be exceptionally tough to get right and could well lead to further disruption to the supply side of the market.
But, it is also important to take note of the cost side of the business as this too has long term implications for the supply side.
According to Townshend, the fair PGMs basket price, which includes a weighted basket of platinum palladium, rhodium, gold, ruthenium, and iridium, currently stands at about ZAR461,855/kg, significantly above the current spot price of ZAR380,000/kg.
"The incentive price analysis suggests that current PGM prices are below levels required to provide producers with an incentive to maintain the current broad base of South African PGM production, let alone plan to increase future output," HSBC writes.
"At the very least, in the current price climate no South African producer can afford to expand capacity and some may rationalize production in 2013.
"Should demand increase, producers might not be able to respond to the increased appetite for metals. This would have a commensurate bullish impact on price."
Based on Townshend's estimates, HSBC says it expects South African platinum production to fall 8% over the course of the year to c4.066moz - which provides its most compelling argument for being bullish on the sector.
Looking to the other producing regions, it expects Russian production, which accounts for roughly 14% of the global total, to rise around 1% over the year to around 765,000oz , while it expects Zimbabwean production to remain flat at about 375,000oz.
While it previously forecast gains from North American producers, these haven't been forthcoming and, as a result, the bank has cut its North America production forecast by 13%, "although output should be steady from last year’s levels," it says.
Adding, "If non-South African production is more robust than we forecast, or if South African producers are forced to curtail output even further, our forecast of supply/demand deficits for 2012 and 2013 may narrow or widen, with a commensurate impact on price."
On the demand side, HSBC expects that demand for autocatalysts to remain strong in the US and China and says although it expects it to moderate somewhat it should be able to offset the impact of ongoing weak demand in Western Europe.
HSBC also expects to see a recovery in demand from glass manufacturers and oil refiners while on the jewellery front, despite a slowdown in Chinese economic growth, it says, " platinum jewellery's status as a luxury good and effective marketing is increasing consumption in that country."
It is however, the success of the recently launched South African platinum exchange-traded fund that has caught the eye.
This rise, HSBC says, combined with steady coin, and bar demand is expected to play a key role in keeping the market in deficit in 2013.
"We are raising our forecast for ETF increases in 2013 to 600,000oz, a 140% increase to our December 2012 forecast. If our forecast is correct, demand for platinum from ETFs will have more than doubled in one year," the bank says.
It adds, that because platinum is a relatively small market, even slight shifts in investment sentiment can trigger flows that can have a noticeable impact on prices.
"Sluggish investment demand in the first few months of the year played an important role in platinum’s price decline, in our view. The launch of the South African ETF in mid-May has already attracted a whopping 371,000oz of platinum demand to date. This is more double the growth in the rest of the platinum ETFs combined this year, which grew 144,000oz. While we do not expect this rapid pace of accumulation to continue, we do believe platinum ETF investment continues to benefit from investors who are seeking hard assets, and may also attract some investors from gold."
So where does this leave the platinum price longer term?
HSBC believes that the platinum market will experience two consecutive years of deficits. The world had one in 2012 and will see another one this year but, it says, deficits do not immediately result in price rallies.
As it points out, "Large deficits in 2002 and 2003 elicited higher prices, but the gains were not significant, and platinum prices stayed well below USD1,000/oz."
But, it adds, at current low price levels, a sizable amount of current production uneconomical. Thus, higher prices are needed if production is to be maintained over the longer term.
"Additionally, the newly launched South African platinum ETF is absorbing a significant amount of metal at a time of static mine production growth. Jewellery demand remains strong and may be benefitting from the dip in prices. Should industrial or auto demand push above forecasts, we believe the market response may be soundly positive for prices, especially if investment demand remains firm."
iPad Version - Platinum grain formed during refining at Anglo Platinum’s precious metals refinery, South Africa: VisMedia +44 (0)20 7613 2555