Platinum to stay flat on oversupply

Platinum prices are going nowhere, at least for the next six months, with markets remaining oversupplied, according to Johnson Matthey, the platinum refiner and fabricator.

Johnson Matthey estimates the metal will trade in a range of $1450 to $1800 an ounce and average $1650, more or less its current level.

With just over a month to go before year's end, in its 2011 interim market review Johnson Matthey estimates that this year's global 8.08million ounces gross demand for the metal will be close to pre-recession levels. That demand will be more than satisfied by higher mine supplies and recycling, giving rise to an oversupply of 195000oz against a deficit of 25000oz in 2010.

The increase in supplies - largely from North America, South Africa and Zimbabwe -- comes despite the wildcat or illegal strikes and safety stoppages that can lead to protracted closures of entire mines in South Africa. It is also despite some of the foot-dragging over future expansions in Zimbabwe as the two majors, Implats and Angloplats, evaluate the effects of further expropriations. North American supply growth is merely a catch-up from the strikes that idled nickel mining in Canada. Platinum is produced as a by-product of nickel.

As for 2012, the outlook is for a small increase in supply from South Africa given the possibility of fewer strikes, flat supply from Russia and Canada and more from Zimbabwe as earlier expansions come on stream and despite nationalisation threats. And yet Lonmin, the third-largest platinum producer, recently lowered its 2012 production estimate in anticipation of strikes and safety stoppages

On the consumption side in 2012, Johnson Matthey cautions that any growth in demand for platinum might be tempered by current macroeconomic uncertainties. Nevertheless, demand fundamentals from the autocatalyst and industrial sectors are expected to underpin demand. Poor consumer confidence could weigh on demand for light vehicles but heavy-vehicle fleets are being re-built in the US and Europe.

Tighter emissions legislation in Europe, China and the US is also set to increase near-term demand for autocats while, in the longer term, the introduction of emission controls on agricultural and construction vehicles is likely to be another growth area. Of course, the more autocats there are in use, the greater the scope for recycling which, Johnson Matthey reckons, will hit 1.88million ounces this year against new mine output of 6.4million ounces.

Investment demand remains positive, directly for bullion bars and indirectly through physical-backed ETFs. But platinum is, above all, an industrial metal and its price is determined more by supply-demand fundamentals than by the kind of febrile investment perceptions that drive gold. While Johnson Matthey sees net investment demand remaining positive this year and next, the net amount is seen as sliding each year.

Palladium, often tagged as platinum's poor cousin, is affected by different market dynamics despite its growing use as a cheaper substitute for platinum in autocats.

For many years palladium supply has been dominated by Russian releases from secret stocks built largely in the Soviet era. But it seems that those stocks are now down to way less than half a normal year's Russian sales. On top of that, grades at the Norilsk nickel mine, which claims to be the world's single largest nickel and palladium producer, is having to cope with falling grades and, hence, lower metals production.

Only South Africa and Zimbabwe are reckoned to increase palladium production this year, but not enough to avert a deficit of supply over demand. By the end of 2011, Matthey forecasts, new metal deliveries will have totalled 7.42million oz and recycling 2.20million oz. But those two sources will have exceeded total gross demand by 725000oz. In 2010, there was a supply-demand deficit of 530000oz.

As for 2012, the palladium market is likely to see a supply deficit, despite the possibility that lower consumer spending could have a knock-on effect on demand for autocats and despite higher mine production slated for Zimbabwe and South Africa. Sharply lower Russian deliveries will dominate and tip the market into a supply deficit.

The next six months are expected to result in a trading range of $800 to $500 an ounce with an average of $650. That average is more or less where the metal's price stands at present.