A market poised for growth
The Implats perspective on the performance of the PGM markets during the financial year reflects a market that is bubbling with growth drivers to the extent that we remain very positive about the medium and long term prospects for the industry. The year in review witnessed the emergence of a sustainable increase in platinum jewellery demand and latterly, greater consumption by the ETF (Exchange Traded Funds) segment. In combination, these two demand segments provided the counterpoint to the reduced demand from the fabrication sector and from a sustainability perspective rescued the industry from the crippling short-term decline in automotive demand.
Over the medium term, sans any further macro-economic shocks, we expect reviving industrial activity to underpin fundamental growth in demand levels.
The forecasts of rapidly escalating long term demand growth from emerging markets and the quantum leap in technological innovation required to sustain this growth are expected to unlock new demand segments for PGM’s to the extent that long-term supply projections will be stretched to meet these anticipated burgeoning demand projections.
Stability returns after catastrophic 2008
Following a 66% plunge in the price of platinum during the financial and economic crisis of 2008, 2009 proved a year of cautious recovery, despite the woes impacting the automotive industry. Bloated vehicle inventories seen earlier in 2009 resulted in drastic production cuts by automobile manufacturers across the developed world, negatively impacting on physical demand for metals. However, the precipitous decline in prices at the end of 2008 together with historically low interest rates re-ignited interest in the metals from investors with platinum and palladium prices tracking gold on the back of increased levels of risk aversion.
Continuing appetite from European based ETFs was augmented by the spectacular boost to demand from the launch of the US ETF’s early in 2010.
The Chinese jewellery market mirrored the performance of the investment sector as low metal prices sparked a surge in interest from manufacturers and consumers, with platinum off-take more than doubling from 2008 and continuing into 2010. While jewellery demand remains highly price elastic, the underlying strength in demand at levels up to $1 500 per platinum ounce augments the outlook for sustainable levels of demand.
Without this physical off-take, inevitably lower prices would have added significant additional pressure to the South African producers. The resulting demand for physical metal sent platinum prices spiralling to over $1 600, double its 2008 low.
Automobile manufacturers had to restart production lines as vehicle sales incentives offered across the major world economies resulted in a scramble by consumers to take advantage of the subsidies on offer. This resulted in the previously historically high inventory levels dropping to historical lows (for several manufacturers) with sustained demand for physical metal noted as a consequence. Restocking by producers at low metal prices exacerbated demand for metals and added additional momentum for prices moving into the top echelons of forecast ranges.
The undoubted story of the year has been the evolution of Chinese automotive demand on the back of incentives offered by the Chinese state into one of the dominant markets globally. While the anticipated gradual withdrawal of incentives will impact on sales going forward, we expect that rising income levels should take up most of the slack.
The growing strength of the auto market was capped by sovereign debt concerns beginning in Greece and spreading to Spain and Portugal raising fears of a double dip recession. The above mix of demand drivers provided a heady brew with platinum prices in the first few months of 2010 experiencing a roller-coaster ride between $1 490 and $1 730.
Investor appetite maintained – but lofty levels are a challenge
Although investors continued to add significantly to their long positions in both the paper markets of NYMEX and Tocom, as well as the physically backed ETFs, it was not all one-way traffic. The travails of the euro in early 2010 resulted in a record sell-off in NYMEX long positions, nearly 400 000 ounces – or one third – in three days. While we are encouraged by the relative resilience of these investors in this uncertain market, a return to risk could see further liquidation. Notwithstanding this massive sell off, investment levels reached all time highs during 2010.
Palladium fortunes were also unpredictable, with growing Asian vehicle sales providing a solid underpin to demand, but the woes of Europe providing a bearish undertone leaving a spread of $170 for the early part of 2010.
Rhodium’s price was buoyed throughout 2009 on the cessation of auto destocking seen at the end of 2008, with the price more than doubling from a 2008 low of $1 000 to reach levels above $2 900 during 2010.
South African production stabilises
While SA supply increased marginally in 2009, a combination of safety issues and industrial action – particularly at our own operations – curtailed what should have been a better year. However, significant reductions in the amount of recycled metal from both automotive and jewellery sources, combined with lower output from North America, is expected to leave the market with a deficit of some 170 000 ounces for 2010.
Outlook
The outlook continues to be dominated by macro-economic drivers. The USA, post inventory rotation has uncovered a more modest level of final consumer demand, with underemployed America seemingly not anxious to restore its ‘consumer of last resort’ status and choosing rather to direct surplus cash towards deleveraging. The sovereign debt crisis in Europe has highlighted the previously ‘papered’ over structural cracks in the initial formation of the EU. The requirement for fiscal retrenchment within the region is expected to curb rapid consumption growth over the medium term. China and increasingly the other emerging nations continue to provide the underlying prop to the global economy during these times of economic crisis. The conservative management of the Chinese economy by the government bodes well for the sustainability of the GDP growth levels to the extent that the eastern bloc should sustain the global economy until the western powerhouses have recovered from their various incarnations of the credit crisis.
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