Will the lead and platinum markets be derailed by auto industry woes?

The recent sales figures coming out of the automotive industry in Detroit have been awful, leading to layoffs at some of the Big Three auto makers and at auto parts suppliers. Since cars are among the largest users of lead (in batteries) and platinum (in catalytic converters), it would seem that the sharp drop-off in auto sales spells doom for the two metals. Analysts say that there are many other factors at play in both markets, and each metal is likely to behave differently.

Edward Meir, senior commodity analyst at MF Global in New York City, says that he does not look at lead consumption in the auto sector specifically, but rather at the lead market as a whole:”I am sure it (poor auto sales) doesn’t help. In more general terms, the lead situation is suffering from slowing demand across the board. We are expecting a surplus this year and next. Warehouse stocks have been rising quite dramatically on the London Metal Exchange…from 50,000 tonnes to 100,000 tonnes over one year.” Pointing out that warehouse stocks have grown five-fold over two years, Meir adds: “The market is not as tight as it used to be.”

Referring to lead produced by Ivernia (IVW-T) at Magellan mine in Western Australia, currently awaiting a permit for shipment through the port of Freemantle, Meir says that the metal will hit the market at some point, further raising supply. Asked about another trend, the switch to thin flat-screen computer monitors and TV’s, which do not use lead, from the older cathode ray tube (CRT) monitors and TV’s, which use lead, Meir agrees that this is another negative for lead demand. On the other hand, he says that demand for lead for ammunition has risen. Meir adds that the lead market shows some seasonality, because car batteries are usually replaced in summer or in winter.

Meir concludes that, for the first time in five years, the lead market is showing a surplus, albeit a thin one, of about 60,000 tonnes out of a total supply of 5.2 million tonnes, and the surplus is projected to grow to 140,000 tonnes in 2009.

Ify Isiekwe, commodity analyst at CPM Group in New York City, says that between 50% and 70% of lead is used in car batteries, so the sales declines in the automotive industry are bound to decrease demand: “It’s definitely going to have a significant impact on the (lead) market,” he says, describing his stance on the market as “cautiously bearish.”

In its commodities quarterly in late June, Deutche Bank forecasts lead prices at US$1.02 per lb. in 2008, US78 in 2009, US65 in 2010, US55 in 2011, US52 in 2012 and a long-term price of US50. In early July, Citigroup forecasts lead prices of US$1.04 per lb. in 2008, US$1.00 in 2009, US90 in 2010, and a long-term price of US30.

Turning to platinum, Tom Pawlicki, energy and precious metals analyst at MF Global in Chicago, agrees that weak auto sales are a negative for platinum, but there are also some bullish fundamentals for the metal:

“There is some growth in Chinese (platinum) consumption, because the Chinese are adopting the European standards for auto emissions…so this offsets some of the losses in U.S. demand for automobiles. At the same time, there have been power outages in South Africa (affecting platinum mining) which ran up the price in late January. Some of the power has been restored, but they are still operating with only 95% of power capacity. There are going to be some supply shortages from South Africa.”

Pawlicki points out that, prior to the adoption of the European emission control standards, China had no such standards at all, so the move is bullish for platinum. Asked about possible substitution of platinum with cheaper alternatives such as palladium, Pawlicki says:

“It is a factor mostly in gasoline engines. They have come up with a mixture of platinum, palladium and some rhodium. That has been a negative factor for platinum (demand). At the same time, they had trouble introducing palladium into diesel catalysts, and therefore they had to use more platinum for diesel. And with the growing popularity of diesel in Europe…this is offsetting the lower use of platinum with gasoline engines.”

Pawlicki summarizes the market fundamentals: “Lower sales figures in autos are being offset by the increasing use in China plus power problems in South Africa. These are two bullish issues.”

Jon Nadler, senior analyst at Kitco in Montreal, says that, besides automotive demand, the platinum market is driven by a myriad of factors. The market has been on a growth path since 2001, attracting hedge funds and “hot money”, as well as exchange-traded funds.

Nadler says that problems with availability of electricity on mines in South Africa will continue to affect supply. Total supply in 2007 was 7.4 million ozs., down 4.75% from 2006. Supply was estimated to decline a further 1.4% in 2008 to 7.3 million ozs., but Nadler suspects that the decline will be steeper because of power problems in South Africa. The country supplied 5.1 million ozs. platinum in 2007, down 6.9%, or 400,000 ozs., from 2006.

Turning to platinum supply from Russia, Nadler says: “We have not really seen sizable Russian sales – maybe they do not have a lot to sell.”

In 2007 Russia supplied 790,000 ozs., down 20,000 ozs. from 2006, despite higher prices. Nadler estimates that supply from Russia will decline again in 2008 to 750,000-760,000 ozs. It is possible that the country is stockpiling some metal, but because platinum inventories in Russia are a state secret, it’s impossible to know whether that’s the case.

Total demand was 7 million ozs. in 2007, and is projected to rise to 7.3 million ozs. in 2008. Demand from the automotive sector was about 4.3 million ozs., or 61% of the total.

In 2006 the market showed a surplus of 750,000 ozs, and in 2007 the surplus dropped to about 360,000 ozs. Nadler estimates a deficit of around 400,000 ozs. platinum this year. He concludes that such a deficit in a market of 7 million ozs. means sustained price strength. He forecasts that for 2008 the downside for platinum prices is US$1,400-1,600 per oz., while the upside is US$2,200-2,300. It all depends on how fast South Africa can restore full electricity supply to the mines. Some mines are installing generators, which should help raise production. Nadler does not believe that Russia can increase production sufficiently to make up lost production from South Africa.

Citigroup forecasts platinum prices at US$2,018 per oz. in 2008, US$1,800 in 2009, US$1,500 in 2010 and US$1,000 long-term. Platinum-focused companies include Eastern Platinum (ELR-T) and Anooraq Resources (ARQ-V, ANO-X), both of which own interests in South Africa.