PGM supplies to continue upswing: GFMS

Facts ‘N’ Figures

Supplies of platinum and palladium posted further gains in 2005. Mine production of platinum rose for the fifth straight year as the industry in South Africa continued to expand, albeit more slowly than anticipated in previous years. Palladium production, meanwhile, increased at a similar rate but was boosted by greater recoveries from catalytic converters in automobiles. In total, headline supply of platinum was up 4% at 7.48 million oz., whereas palladium rose by just over 6% to 7.56 million oz., according to Platinum & Palladium Survey 2006, an annual publication of precious metals consultant GFMS.

The survey says platinum consumption in autocatalyst manufacturing was up sharply in 2005 on the strength of Europe’s light-duty diesel market, and the phasing in of more stringent emissions regulations there. However, with demand in other industrial applications remaining steady, the gains in autocatalyst were eclipsed by a substantial decline in platinum jewelry fabrication. This was an ongoing reaction to high platinum prices, which continued to rise over the year. Again, the most severe effects of this were seen in China, platinum jewelry’s largest market. Faced with a cocktail of consumer resistance, thin margins and intense competition — from gold and palladium jewelry — Chinese fabrication of platinum jewelry fell by 24% last year. As a result, overall demand for platinum eased to 7.53 million oz. in 2005.

After its stunning debut in 2004, high- purity palladium jewelry gained further traction in China last year as fabrication rose 23%. This was augmented by higher demand in other countries, where palladium’s use in white gold increased and early stage manufacturing of palladium jewelry appeared. Meanwhile, autocatalyst demand for palladium — by far its largest application — finally stabilized in 2005 after successive declines since 2000. With steady growth in other industrial uses and an assist from higher investment in retail bullion products, total demand for palladium rose by 6% in 2005 to 7.83 million oz.

Platinum’s residual deficit, which has persisted for several years, was virtually eliminated in 2005 as supply and demand converged. At the same time, palladium again experienced heavy releases from above-ground stocks, far in excess of the amount required to balance supply and demand. Consequently, palladium remained in surplus, with the level rising significantly in 2005.

In 2006, GFMS expects that platinum will return to surplus and that prices will trade in the range of US$980 to US$1,250 per oz. Palladium is expected to remain in surplus with prices trading in the range of US$250 to US$400 per oz.

PGM boost in South Africa

South Africa generated a large part of the increase in global mine supply of platinum and palladium. Volumes of platinum in the country rose by 3%, representing 56% of all mined platinum; and palladium was up by 5% year-on-year, a 38% share of global palladium mine supply.

South Africa’s impressive run has seen mine output in platinum and palladium increase at an annual average rate of 5% over the last decade and in 2004 by a respective 6% and 7%, year-on-year. According to the survey, however, last year’s increase was the smallest measured rise since 1998. A part of the slowdown in 2005 was attributed to the loss of platinum production at Anglo Platinum in the last quarter in the wake of an explosion at the Polokwane smelter.

“Higher output at a handful of ramp-up projects combined with the start of full- scale mining at (Implats’) Two Rivers, should see platinum volumes in 2006 grow by 8% year-on-year and palladium by a stronger 9%,” says GFMS senior analyst Bruce Alway, on higher platinum production from South Africa. Part of this growth is expected to come from the release of concentrates built up during the disruption at Anglo Platinum’s Polokwane smelter.

Elsewhere, production in North America should rebound from a difficult year in 2005, when output was adversely affected by a number of operational difficulties. In Russia, Norilsk Nickel is forecasting a 7% decline in palladium volumes to 2.9 million oz. (91 tonnes), and a 7% fall in platinum production to 895,000 oz. (21.6 tonnes).

Completing the group of leading platinum and palladium producers, Zimbabwe should see a modest improvement in output in 2006, thanks to an expansion at Mimosa, jointly owned by Implats and Aquarius Platinum. In a recent development, President Robert Mugabe endorsed a plan to acquire a 51% interest in all mining companies, putting the country’s future and more ambitious expansion plans in question.

The net impact of the changes outlined above should see world platinum mine production in 2006 increase by 6% and palladium output rise by a more modest 1% year-on-year.

Chinese PGM market

Developments in the Chinese market last year had a significant bearing on both global platinum and palladium use in jewelry. In platinum, higher raw material prices continued to thin margins of fabricators and discourage consumers. Together with competition from gold and palladium in the jewelry sector, the survey concludes that these factors cut over 250,000 oz. of Chinese demand for platinum in jewelry, leaving the total at its lowest point in seven years.

GFMS notes that palladium’s use in white gold in China was also higher last year, but it was the increase in the manufacture of palladium jewelry, which was the key driver behind the country’s near one-quarter rise in demand in 2005. To put this into perspective, GFMS says that, in just two years, Chinese demand for palladium in jewelry has risen nearly fourfold.

In other markets, the survey highlights that platinum jewelry demand was softer in every key market, chiefly the result of higher metal prices. In absolute terms, Japan recorded the largest fall (outside of China) with 2005’s total nearly half of that in 1999. However, it was a completely different story for palladium, where increases were seen in Europe and North America. Although this was mainly for white gold, some early stage palladium jewelry manufacturing was also evident.

“At prevailing prices, we expect platinum jewelry demand to remain under pressure, with further losses probable,” says GFMS senior consultant Peter Ryan, on the outlook for jewelry demand this year. “The real question has to be what impact current palladium prices will have on demand, especially in China. Last year’s average was just US$201; we are now some US$150 above that. China is a price elastic market, as we have seen over the years in gold, and more recently in platinum. Although palladium jewelry is on the up, current palladium prices are likely to have an adverse effect on demand this year.”

— The preceding is an edited version of an information bulletin published by London-based precious metals consulting firm, GFMS.