Platinum: a look at supply and demand - Peter Duncan - GM, Market Research: Johnson Matthey

The white metal has been in the news a lot lately both from the supply and the demand side but, current indications are for a market that is moving closer to balance than last year

GEOFF CANDY:  Welcome to Mineweb.com's Freshly Polished Metals Weekly podcast when we take a look at the big issues affecting the mining sector.  This week we're looking at platinum, the price of which has fallen around 15% from a 21 month high in April.  It's currently around $1541/oz and it's a metal that is definitely had its fair share of headlines recently, especially with regard to the companies that pull it out of the ground.  To help us navigate all the white noise around the white metal we're joined on the line by Peter Duncan, he's the general manager for market research at Johnson Matthey.  Peter perhaps the best way to approach the story is perhaps to split it up into first the supply side of things, and then the demand side.  And on the supply side, the big story last week was the news out of South Africa that the government has issued a directive telling miners that they need to change the way that they mine - or particularly some of the mining methods that are being used.  This affects particularly the ‘bord and pillar' mining method - this hit Aquarius Platinum quite hard - how important is this development?

PETER DUNCAN:  It's probably a little bit early to say yet what the total impact is going to be, because the producers themselves are still struggling to interpret exactly what's required and how they're going to handle it.  But if you look at the overall production from the area that's immediately affected, we're talking about platinum and chrome mines in the North West region - the Western Bushveld, south and east of the Union Section - so that amounts to a total annual production of platinum of just under half a million ounces.  So it's going to be a percentage of that.  I've heard different figures of up to 20%, 25% and down to virtually nothing - the 20%, 25% is probably an exaggeration and more likely we're going to see - I don't know, maybe down 10% to 15% - it's a bit early to say but I'd be very surprised if it were more than 100,000 ounces a year, lets put it that way.

GEOFF CANDY:  Lonmin also came out last week saying their refined platinum sales were down around almost half because of repairs that needed to be made to a furnace.  How are these kinds of developments affecting the overall balance?

PETER DUNCAN:  Well we're certainly getting a lot of one-off - you and I call them problems at the moment - we always call them one-off but they seem to happen every year, don't they.  There's always some little bit of bad news that dents production.  In the case of Lonmin obviously they're hoping to still refine their concentration and make it up that way and get to their targeted figure for the year.  And overall I would say that with a certain amount of new production coming online this year, that we're still likely to see a modest amount of growth in the overall South African platinum supply.  But it will be modest.

GEOFF CANDY:  There has been some concern with the way in which the South African government is getting involved in the way that mines are mining. And, added to that there are all these cost pressures, there are union pressures and, particularly, from Eskom, there are significant increases in prices for electricity. How is that going to affect South African platinum production?

PETER DUNCAN:  The platinum mining industry in general and South Africa is always likely to face inflation higher than CPI and obviously that's an important driver of price going forward because pretty much it becomes a cost-driven industry.  So it's a constant challenge the industry faces each year that costs are escalating faster than CPI and so if they're not able to constantly improve productivity which wont always be possible, then it means that long term the price has to go up, I would say.

GEOFF CANDY:  I suppose the other question is, where are the other sources of supply coming in then?

PETER DUNCAN:  South Africa is far and away, as far as platinum is concerned, the most significant supplier of platinum to the market.  It's of the order of 80% of the world's platinum supply comes from South Africa.  The second most important area is Russia - Russian production for platinum is fairly constant, fairly static - it's a by-product of nickel and so what that really means is that if you suddenly wanted a lot more platinum you couldn't dig an awful lot more - nickel out of the ground to get it so it's really a function of how much nickel they're going to produce and that's fairly flat.  Grades have perhaps deteriorated slightly year-on-year in the last few years, but that's been offset by better recoveries.  So Russian production going forward is going to be reasonably flat.  And then you've got the North American production where it's usually a by-product of nickel as well, or sometimes a by-product of palladium in the case of a couple of mines in North America.  Again, because it's a by-product there's nothing that will greatly affect the supply side of platinum as long as the primary products, which they're mining, are not affected - certainly it's not a tap that you can readily turn on or off.  So they're going to be relatively flat going forward as well - the growth potential, all other things being equal, is in Zimbabwe where there are still significant reserves of platinum and where they're growing in percentage terms, quite strongly in the last few years - but obviously that has its own potential difficulties going forward.

GEOFF CANDY:  If we look at what's going on with the price itself - we heard from Anglo Platinum today that their numbers - or six fold increase in earnings - Johnson Matthey yourselves last week saying that you saw 47% increase in earnings, and this is because of higher prices and we saw a significant jump from year end 2009 towards April 2010 or thereabouts - how much of that is likely to show through the numbers going forward?

PETER DUNCAN:  As far as price is concerned we make two formal forecasts a year - one in May when we bring out our Platinum publication and one in November when we bring out the interim publication - so we haven't got any revised forecast to give at the moment except to say that price is being badly affected in the last couple of months by the extent of the sovereign debt crisis in Europe and that took most people by surprise.  By and large I would say that the prices going forward are looking to recover a little bit so I'm still reasonably bullish as far as the price of both platinum and palladium is concerned.  It's hopefully gone towards the lower end of the range that we'd expect it to operate in.  Demand is picking up, supply has the difficulties that we alluded to and so overall the sentiment is for the price to rise.

GEOFF CANDY:  Lets talk about demand quickly - there's been a lot of talk around the car industry because that is still the major buyer of platinum for auto catalysts.  Chinese growth - there have been concerns around the level of Chinese growth and the slowing of the Chinese economy.  We saw an uptick in European car demand in the first half of the year - how concerning is a slowdown in China to platinum?

PETER DUNCAN:  Actually China is a bit of a misunderstanding - China is not that significant as far as the auto industry is concerned because it's primarily a gasoline market which uses mainly palladium - so there is less than 200,000 ounces of platinum used a year in the Chinese auto industry.  That said, the growth in China is slowing down, but relative to last year, which had 50% growth - that's hardly surprising.  We're still expecting - most independent market forecasters on the auto industry are expecting double-digit growth in China this year.  Certainly that's been the case so far, so I don't think the Chinese situation is that important as far as the auto industry is concerned, for both those reasons.  Probably the more important thing for platinum demand in the auto industry is the European diesel share - diesel engine catalysis is the main driver of platinum demand and diesel share in Europe having been above 50% fell quite significantly last year to what's really going to be important going forward, is how quickly the diesel share of the market recovers.  We're certainly seeing signs of diesel recovery so far on the fleets, which are typically dominated by diesel, so those are starting to come back in.  So really, going forward it's a case of European diesel share recovery driving platinum demand and at the same time, in the same way that the industry rand down on the stock of vehicles - production fell last year by a lot more than sales fell.  This year it will be the opposite - we'll probably see a build up again of car inventories and of course that will drive demand for PGMs and catalysts, so overall a fairly positive picture but seeing into the future at the moment is quite difficult.

GEOFF CANDY:  What about the impact of the US market, and particularly the threat of a second dip into recession?

PETER DUNCAN:  Yes, this is a problem that we have so little visibility at the moment and we certainly see very strong demand in the first part of this year - as you mentioned earlier - but going forward it's quite difficult to predict forecasts from car companies themselves change quite a lot and everybody is suffering the same level of uncertainty as to whether we can see this double dip or whether things will just continue to recover.  So I would say that so far so good, but we can't see that far into the future, but again if we're talking just platinum, the States is fundamentally a palladium market as far as auto catalysts are concerned because it's got a relatively low share of diesel.

GEOFF CANDY:  Just to close off with - two other markets are clearly jewellery and then investment - and that comes into the ETF side of things.  The ETF has been a big success and that's clearly changed the market somewhat as well...

PETER DUNCAN:  Yes that's right - in a typical year auto demand is something like half the total demand, and industrial demand - all the other industrial demands together are something like a quarter - and that's left about a quarter of the market which was taken up by jewellery and investment.  But what we saw last year, was auto fell off dramatically and hit the rest of industry and jewellery sort of rose to fill the gap and became over 40% of the total market and then investment - including ETF investment - was something like 9% or 10% of the total.  What this does really, it obviously helped the market through a difficult time but when you have such a large chunk of the market which is dependent upon jewellery and investment it certainly focuses analysts like myself on what's likely to be developing those markets.  As far as jewellery is concerned, it's a pretty good story - there's a long way to go.  The biggest market by far for platinum jewellery is China - although demand has fallen off a bit this year - that's hardly surprising because we saw a large period of stock building in the first half of 2009 which is unlikely to be repeated.  But the underlying demand in China is still very strong, and almost irrespective of price, we see that that has a long way to go before it approaches any ceiling.  So that's quite solid.  Investment demand is an interesting one in a way because investment products - ETF products in particular are so young that we have very little history on which to judge the way that they'll behave to movements in price.  So far we've seen significant growth in ETF investment this year, after the launch of the US-based ETF fund.  How much of that of course is pent up demand and how much reflects what demand will do going forward is a little bit more difficult to say.  Certainly the demand - the rate of growth in cumulative holdings has fallen, but there's no real evidence here that people haven't taken any profit and in fact the cumulative demand in ETFs has just grown irrespective of what price has done - so we saw no or very little exiting of positions when the price dropped recently and the curve has continued to go smoothly upwards.  ETF investment - difficult to say what's going to happen long term but so far, it's looking fairly sticky, as we say - it's looking to hold onto the platinum that it's bought.

GEOFF CANDY:  If one looks at where we're going now and in terms of the rest of this year and into next year - what are your thoughts - what do you think the price is going to do?

PETER DUNCAN:  Well I wouldn't give an actual price forecast as such because we do that formula only twice a year, but what I'd say is that supply at best is going to grow a little bit - it's certainly being hit by a number of issues and it's going to struggle to grow at a fast rate - it's likely to show a modest amount of growth this year, demand so far has recovered very strongly.  There is some uncertainty I suppose going forward, as to whether we're going into a double-dip recession, but I would certainly expect demand to be stronger this year in all the industrial applications that it was last year.  Jewellery remains quite firm and investment demand likewise seems to be quite sticky.  So the demand side seems to be holding up quite well and all of that points to a market that is moving closer to balance than last year and therefore I suppose one could say that that is supportive of a continued least current level of price if not price moving slightly upwards.

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