The platinum market is expected to move into deficit this year, with a resurgence in investor activity to outweigh modest falls in industrial and jewellery demand, says Johnson Matthey (JM) in its latest platinum group metals (PGMs) market report.

The science multinational company expects a tentative recovery in autocatalyst consumption, as stricter heavy-duty emissions legislation is enforced in China and India over the next two years.

JM forecasts a modest increase in primary supplies, but says this could be tempered by electricity shortages and potential industrial action in South Africa, while growth in recycling may be dampened by processing capacity constraints in some regions.

The report finds that, during the first quarter of this year, investors took advantage of low platinum prices to buy nearly 700 000 oz of platinum exchange-traded funds (ETFs).

JM says the steep climb in palladium prices since August 2018 has led some investors to conclude that platinum was underpriced, in view of its potential as a substitute for palladium in automotive applications in future.

Meanwhile, the outlook for PGMs mining in South Africa is increasingly uncertain, with producers facing steep electricity price increases, periodic disruption to power supplies and a risk of industrial action during upcoming wage negotiations.

Resultantly, there has been a turnaround in investors’ sentiment, particularly among European and South African ETFs, who have bought 637 000 oz of platinum between January and March this year. “This appears to be net new investment in PGMs, rather than investors switching out of palladium into platinum.”

“This reversal in sentiment and the recent improvement in price do not yet reflect any significant, fundamental changes in platinum consumption in automotive or industrial applications. Despite the recent surge in ETF buying, our estimates suggest that the platinum market will be in only a modest deficit in 2019,” notes JM.

The company adds that, excluding investment, demand will fall marginally this year, mainly owing to weakness in the Chinese platinum jewellery sector.

“There is clearly some short-term downside risk to primary supplies, which could continue to support both price and investor sentiment. There is also some upside risk to demand. High palladium prices have, to date, had only a very limited impact on platinum consumption, but, in the last year, several new test programmes on platinum-containing three-way catalysts have been initiated.

“Although there are technical challenges to overcome, we think there may be potential for additional platinum use in gasoline applications within a two- to three-year timeframe.”

JM’s forecast includes 700 000 oz of platinum bought in the first quarter of the year, but takes a neutral view on the rest of the year, assuming that any further buying will be offset by profit taking.

Platinum supplies are forecast to rise modestly in 2019, assuming the South African PGMs industry can navigate obstacles such as power shortages, electricity cost increases and potential strike action.

Although platinum price weakness has resulted in significant rationalisation of the PGMs mining industry in recent years, to date this has had surprisingly little impact on PGMs output, according to JM.

“Shaft closures have been broadly offset by the ramp-up of some newer, more profitable operations, along with an increase in the amount of metal recovered from the retreatment of chrome and PGM tailings.

“While there are some further shaft closures to come, we think the South African PGMs industry can probably maintain mine output at levels close to those seen in 2018 for at least one more year.

“In addition, there are currently some excess PGMs in refinery pipelines which should be released during 2019,” the company notes.

Consumption of platinum in industrial applications is forecast to be slightly lower than last year’s record total but will nevertheless be the second highest level on record.

JM says buoyant demand is primarily owing to structural factors, with glass, petroleum and chemicals companies adding capacity to meet growing demand for products such as fibreglass, plastics and silicone. Platinum’s low price compared with that of other PGMs has not been an important factor in most industrial applications, where PGMs demand is generally insensitive to price.

While the outlook for investment, industrial and automotive demand is largely positive, this is less true for the jewellery sector. JM states that the Chinese platinum jewellery market had a very slow start to this year. However, the company believes the picture may have been distorted by purchasing by individuals and companies connected to the jewellery sector, which occurred during the second half of 2018, but which the company did not include in its demand estimates for last year.

“As platinum prices rose in early 2019, it is possible that this metal was sold on to jewellery fabricators.

“Our forecast envisages a further 5% decline in gross platinum jewellery fabrication in China, reflecting a combination of economic uncertainty, a shift in consumer preferences towards gold jewellery and the relative ease with which manufacturers can switch their production between the two metals to maximise margins.”

JM adds that, with only minimal capital investment and staff retraining required to switch from platinum to 18 kt gold, many platinum jewellery fabricators have chosen to diversify their output.

Chinese jewellery manufacturers continue to source a significant percentage of their metal needs from scrap. Traditionally, there was no cash market for platinum jewellery scrap in China.

However, recent years have seen the development of a network of independent scrap collectors who buy old jewellery for cash, and jewellery retailers in some cities have now begun to offer this service, JM explains.

“Looking forward, we think the proportion of jewellery fabrication demand that is supplied from old scrap will continue to rise and we, therefore, anticipate further declines in net platinum consumption, even if retail demand for platinum jewellery stabilises.”