GFMS: Platinum, palladium prices to rise in 2011

The following was released by GFMS and outlines the highlights of its Platinum & Palladium Survey 2011. The summary draws from a briefing given by GFMS chairman Philip Klapwijk in London. For more information and to buy the full report visit www.gfms.co.uk.

Reviewing platinum first, the consultancy sees the metal as having registered a gross surplus of almost 1 million oz. in 2010, which represents an increase of 10% to the highest level in GFMS’ 12-year data series and it was the sixth consecutive year of a gross surplus being recorded. Klapwijk commented, “The core message here therefore is that, despite a decent rise in fabrication demand as the world economy got back on its feet, there was an even greater supply response, partly as a result of firmer platinum prices.”

A key change for demand was the 16% rise in autocatalyst fabrication but the level achieved remained low on pre-crisis volumes due to a sluggish recovery in Europe’s diesel sales plus further thrifting and substitution to palladium. The benefits of an improving economic backdrop were also apparent in GFMS’ figures for offtake by the chemical industry and yet more so the glass sector. In contrast, heavy price-led losses in Chinese jewelry demand fed through to a 17% drop for the global jewelry figure. As for supply, jewelry scrap rose by 30%, while autocatalyst scrap grew by a notable 15% as it returned to a secular growth path, partly as a result of collectors no longer withholding supplies for lengthy periods. In addition, for the first time in four years, mine production in South Africa rose (by 3%), in part due to a release of metal from the process pipeline, and this, plus gains in Zimbabwe, outweighed losses elsewhere to give a global 2% rise in output.

The fact that platinum prices rose in 2010, despite another gross surplus, was attributed to sustained investment, with the launch of the first U.S. platinum exchange-traded fund (ETF) and the marked rise in total ETF holdings singled out. Klapwijk noted, “Platinum, along with the other precious metals, benefited from a range of factors such as low interest rates, inflation fears, Eurozone sovereign debt travails and quantitative easing in the US.”

As for 2011, GFMS is expecting another sizable gross surplus, partly as mine output is set to rise, due mainly to forecast gains in North America, and both jewelry and autocatalyst scrap are also forecast to increase. Demand should also grow but only modestly as disruption in Japan from its recent earthquake, still sluggish European diesel sales and substitution limit autocatalyst needs and as the price constrains jewelry demand. Despite that, Klapwijk stated, “Higher investment on the back of a supportive macroeconomic environment and bullish gold prices should mean we’ll see platinum comfortably north of US$1,900 by year-end.”

The principal change for palladium was its return in 2010 to a substantial gross deficit, which GFMS estimates at just over 550,000 oz. Much of this was due to the 30% or almost 1.2 million-oz. recovery in autocatalyst demand to a 10-year high, chiefly as car sales rebounded, especially in gasoline and therefore palladium-focused markets, but also as a result of substitution within diesel from platinum to palladium. There was also a notable recovery for electronics offtake, again to a 10-year high. Not all was positive for demand as jewelry offtake fell by more than 300,000 oz., due largely to losses in China. On the supply side, GFMS believes that, after three years of losses, mine production rose, by 5%, with most of the gains originating in South Africa (including the release of refining circuit inventory). Autocatalyst scrap also increased, and by more than 20%, as higher prices largely eliminated supply withholding and due to improved recycling efficiencies.

This return to a marked gross deficit and the emergence of the first residual deficit since 2000, contributed to the doubling in palladium’s annual average price, but GFMS also believes that investor interest was critical. Klapwijk added, “We certainly saw some profit taking in the OTC (over-the-counter) market as investors closed out long established positions. However, sentiment was lifted by the launch of the first-ever U.S. ETF and the inflow of over a million ounces into all ETFs over the year was remarkable.” Such support was felt necessary to overcome still substantial disposals from Russian state reserves since, in 2010, GFMS estimates that these sales reached 800,000 oz.

Looking ahead, GFMS preducts palladium will again see a large gross deficit since ongoing, if less dramatic, gains for autocatalyst demand should broadly counter the marked rise in North American mine output and further gains for autocatalyst scrap. Investment in ETFs should also remain significant, if well short of 2010’s impressive volumes. Sales from Russian government reserves should also again feature in 2011, although thereafter only residual volumes were expected as this sales program winds down. However, as the background to broader investment in precious metals remains supportive, the consultancy expects the price to push higher, perhaps reaching US$975 before year-end.