(Updating earlier story with comments from CPM Group officials at presentation in conjunction with PGM yearbook release)

(Kitco News) - Global platinum supply exceeded fabrication demand by 305,000 ounces in 2010, but this was more than offset by a 551,000-ounce increase in metal held by exchange-traded funds, CPM Group said in its Platinum Group Metals Yearbook 2011 released Tuesday.

Platinum, as well as its sister PGMs, continued to recover from the sharp drop back in 2008 that was triggered by the global financial crisis. Both fabrication and investment demand continued to rise.

Platinum prices posted a record annual average of $1,614.22 an ounce in 2010, up 32.9% from the prior year, the report said. The end-of-year price rose 21.5% to $1,773.30 from $1,460 in 2009.

“An overall improvement in the global economic environment
during 2010 helped boost fabrication demand in all the major uses of platinum except jewelry demand,” CPM Group said.

Fabrication demand for platinum rose 3.1% to 7,128,000 ounces in 2010. This marked the first increase in annual platinum use in three years, although it remained below the 7.8 million ounces from 2008.

CPM Group looks for a further 3% increase in platinum fabrication demand in 2011 to around 7,340,000 ounces. “Growth is projected in all major sectors of platinum fabrication
demand,” CPM Group said.

As for 2010, demand from the auto sector rose by 345,000 ounces, nearly offsetting the decline of 357,400 ounces from the jewelry sector, CPM Group said. Auto catalysts represent 43.3% of total platinum-fabrication demand, CPM Group said.

Global platinum jewelry demand declined to 1.9 million ounces in 2010 from 2.3 million the year before, CPM Group said.

“The decline in platinum jewelry demand was driven largely by a sharp increase in the price of the metal,” CPM Group said. “Given that consumers view jewelry as a discretionary purchase makes
jewelry both price elastic as well as income elastic.”

However, demand for platinum in auto catalysts rose due to a combination of tightening emissions standards, a 12.5% increase global auto sales to 74 million vehicles, a recovery of market share in Europe for diesel engines (which rely on platinum rather than less-expensive palladium), and an increase in commercial-vehicle sales around the world. Auto catalyst demand stood at 3.1 million ounces in 2010, up 12.6% from 2009. It had fallen to 2.7 million in 2009, the lowest level since 2001.

There were also “healthy increases” in other sources of fabrication demand in 2010 as the global economy crept out of recession, CPM Group said. Platinum demand from the electronics sector rose 15.5% to 305,000 ounces. Fabrication demand for chemical- and petroleum-refining catalysts climbed 11.4% to a record 579,000.

Meanwhile, investors purchased platinum in 2010 to gain exposure to price appreciation that resulted from rising fabrication demand, CPM Group said. Six new ETFs involving platinum were launched in 2010, playing a major role in the net addition of 551,000 ounces to these holdings. This included ETF Securities’ launch of a platinum ETF in the U.S., which alone accumulated 427,629 ounces during the year.

“These net additions to platinum ETFs were larger than the surplus of newly refined supply entering the market relative
to fabrication demand in 2010, which was 305,000 ounces,” CPM Group said. “This suggests that the strong investment demand
had managed to push prices high enough to encourage sales of metal from earlier investors, who had purchased the metal at much lower prices.”

CPM calculates its market surplus using supply and fabrication demand, but not investment, in order to establish the tightness of a market based on fundamental influences alone, said Jeffrey Christian, managing director, at a presentation on the PGM Yearbook. He outlined a three-tier system for analyzing commodity markets.

The first tier is markets with either supply deficits or small surpluses based solely on supply and fabrication demand. “Those are the most bullish markets,” he said. The second tier is those with a surplus, but investment demand exceeding that surplus. “The third tier is where there’s a surplus, but investors don’t want that surplus,” Christian said.

Two other widely followed reports so far this year also concluded platinum was in a surplus during 2010. GFMS’ annual report estimated a surplus of 962,000 ounces. Johnson Matthey listed a smaller 20,000 surplus, although unlike the consultancies, JM calculated its surplus after investment demand.

CPM Group estimates that the total holdings of platinum around the world—in various forms of investment or held by commercial entities acting as investors in that they are waiting for higher prices—amount to some 5 million ounces, Christian said.
Recycling Drives Majority Of Increase In 2010 Platinum Supply

The 4.9% rise in total refined platinum supply in 2010 to 7,433,000 ounces was driven in large part by an increase of secondary supply. Scrap accounted for around 61% of the 348,000-ounce rise in total platinum, CPM Group said.

Secondary recovery of platinum was estimated to have risen 28.5% to 964,000 ounces. CPM Group projected another 13% increase this year to around 1.089 million ounces as still-higher platinum prices stimulate further scrap flows.

“This significant contribution from secondary supply can be explained largely by the combination of the recovery of the auto market in many major markets around the world, which boosted
the deregistration of older cars, and the effects of higher prices in luring out platinum-bearing scrap during the year,” CPM said. “The number of cars available for scrapping increases when consumers purchase new cars, which makes spent auto
catalysts available to recyclers to recover the metal.”

Further, high prices tend to bring about scrap sales of old jewelry.

Mine supply grew in 2010 for the first time in three years, by 2.1% to 6,469,000 ounces, CPM Group said. Much of this was due to increased in output from South Africa. The country is the world’s largest platinum source, with around 5 million ounces of mine output, or roughly four-fifths of the global total.

Still, the consultancy said, a number of forces in South Africa are keeping output from rising further.

“Many of the problems that have plagued South African miners in recent years, such as the electricity and skilled labor shortfalls, are still very much present and are expected to remain unresolved over the next several years,” CPM said.

This both raises the cash costs of mining and discourages some investment in exploration and development of new mines. Still, CPM Group projected that mine supply will rise another 5.3% this year to 6,813,000 ounces, but cautioned that the potential for power shortages could disrupt mining activity and reduce the supply. Combined with the expected increase in scrap, total refined platinum supply is forecast to rise 6.2% in 2011 to 7.9 million ounces, the consultancy said.

CPM Group reported that PGM exploration began rising at a healthy clip in 2002 and approached $325 million as of 2008. When mining operations were hit hard by the financial crisis, however, this spending tumbled to $146 million in 2009 and rose only modestly to $165 million in 2010, CPM Group said.

“This suggests potential further supply constraints going forward, not only because of South Africa's country risk and other issues, but also because of insufficient financing availability for developing additional capacity in the medium term,” CPM Group said.

The consultancy reported that the cost of mining platinum group metals in South Africa rose by 14.3% in 2010, mostly due to rising labor and electricity costs.

“The production weighted annual average cash cost per ounce of
PGMs mined rose to $819.17 in 2010, up from $716.45 in 2009,” PGM group said. The figure was calculated using roughly 94% of total PGM production in South Africa. The cost had been just under $300 back in 2003.

Some of the increase in cash costs cannot be easily resolved, such as the country’s tight electricity market, CPM Group said. State power utility Eskom increased electricity prices by 25% in 2010, the first year of three planned such hikes. This alone translates into a 2% increase for total cash costs for PGMs, said Erica Rannestad, commodities analyst with CPM Group.

 “In the case of labor, in the past few years, wages have been increasing at a higher…pace than inflation in South Africa,” she said.

The average minimum wage for workers in South African mining and quarrying industries rose 12.3% in 2010. Labor accounts for around 50% to 55% of PGM cash costs, CPM Group reported. Costs for steel, which accounts for about 20% of total PGM costs, and crude oil (5%) also rose last year.

The consultancy expects the production-weighed annual average PGM cash cost will rise by somewhere between 5% and 20% this year.

By Allen Sykora of Kitco News; asykora@kitco.com

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