Record platinum deficit of 1 million ounces expected for 2023 as demand surges and supply is at risk - WPIC
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(Kitco News) The latest estimates see a record platinum deficit of nearly one million ounces for 2023 as demand accelerates and supply remains very tight, the World Platinum Investment Council said.
The latest update projects a deficit of 983,000 ounces for this year, up 77%, with demand rising 28% and supply dropping 1% from 2022, Edward Sterck, director of research at World Platinum Investment Council, told Kitco News.
"This is a record deficit in the time series that we have going back to 2013 — at almost a million ounces," Sterck said. "It's a record deficit going back as far as other records show into the early 1970s as well."
Total supply is expected to fall to 7.2 million ounces, and demand is anticipated to reach 8.2 million ounces. The reason behind the deficit is a material shortfall of production versus demand after the latter has surged, led by the automotive sector and industrial demand.
"Automotive demand is really being driven by a combination of ongoing substitution of platinum for palladium in gasoline vehicles. And also tighter emission standards in China, which are resulting in an increased market share of platinum-containing exhaust systems on heavy-duty and non-road vehicles," Sterck explained.
Meanwhile, the industrial demand is dominated by capacity additions, and investment demand is also rising. ETFs are finally seeing inflows after significant drawbacks in the last couple of years. Year-to-date, ETFs are up around 240,000 ounces, Sterck pointed out.
"This is very much investors reacting to the deficit and seeing a potentially attractive outlook for platinum and responding accordingly," he said. "The Fed has also indicated that they're going to pause at these levels. Inflation is still a big risk. But the trajectory of rate increases has changed. And people are looking at ETFs again with slightly less concern around the impact of rates and the need to hunt for yield."
The supply side remains very tight, with mine supply looking flat year on year and down 6% versus long-run production average run rates. Recycling supply is also expected to be flat in 2023 and down substantially from previous years. From 2021, it is down 12%.
There are also power supply challenges in South Africa and the potential impact of sanctions against Russia. Both are weighing on the supply outlook. "There's certainly potential that the one million-ounce deficit could grow if we see those supply risks come through," Sterck said.
These trends will likely remain the same in the near term, leading to the deficit to be sustained. "We had that big shortfall in production versus demand as a result of the semiconductor crisis, we saw inventory levels drop dramatically within the auto space. There's an element of inventory rebuilding that's going to come through regardless of the macro environment. And that's really where the demand-pull for PGMs comes from," Sterck elaborated.
Breaking down demand
This year, strong automotive demand is coming from China due to the push to tighten emissions. And the industrial demand growth has been broad-based but still with a heavy China bias, Sterck noted.
The increase in demand has been one of the biggest surprises this year. "The scale of the deficit we've been forecasting has been increasing. The first time we published the estimates for 2023, the deficit was a little over 200,000 ounces. Then, it was about 550,000 ounces in March. And this time, we're talking about almost a million," Sterck pointed out.
Platinum has many applications, including chemical, petroleum, electrical, glass, medical and biomedical, spark plugs for gasoline engines, and electrolyzers for producing green hydrogen.
What does the deficit mean for prices?
Commodity markets are known to self-correct for surpluses or deficits. For example, if there is a surplus, the price would fall until supply starts to be taken offline. And in case of a deficit, the price would increase until there's demand destruction, Sterck explained.
But in the case of platinum, the considerations around changing mine supply are very complex. "You've got multiple different commodities that feed into that. Added to this, you don't have the electricity available to increase production in South Africa," he said.
There are above-ground platinum stocks available to offset the deficits. But the question is, at what price point will those above-ground stocks make their way into the market?
"There's a whole cross-section of people who are holders of these above-ground stocks, and they all have different price expectations. Some will be willing to sell at low prices, and some will be more likely to wait for higher prices before selling into the market," Sterck added.
At the time of writing, spot platinum was trading at $1,059.10, down 2.5% year-to-date but up 12.1% in the past three months.