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Allen Sykora

Supply Deficits Expected For PGMs In 2013 As Demand Picks Up But Supplies Constrained

By Allen Sykora of Kitco News
December 20, 2012 11:14 a.m.

(Kitco News) - The platinum and palladium markets may well face supply deficits again during 2013, with output likely to remain constrained while demand for platinum group metals in automotive catalysts picks up as the global economy recovers.

“We expect to see a tight market next year in both of the PGMs,” said Rohit Savant, senior commodity analyst with the consultancy CPM Group.

The end result is most analysts see average prices for 2013 that are steady to sharply higher than where they were shortly ahead of Christmas, with the market moving to its strongest levels in the second half of 2013 as the global economy gains momentum.

“The supply side is rather lackluster to say the least,” Bart Melek, director of commodity strategy with TD Securities. “If we do get an economy that is actually recovering, particularly in Europe and China, the PGM market could tighten up in a hurry. Mine supply is very inelastic and now it’s under duress. It’s unlikely the supply side can react very quickly (to increased demand).”

Further, rising costs mean producers will need higher prices to justify the capital expenditures needed for future development projects and thus new supply down the road, analysts said.

For 2012, platinum is moving to a supply deficit of 400,000 ounces from a surplus of 430,000 in 2011, said Johnson Matthey in its widely followed Platinum Interim Review released in November. The shift in palladium was even more dramatic, as Johnson Matthey listed a deficit of 915,000 ounces after a 2011 surplus of 1.255 million.

Other analysts look for this shift toward deficits to continue during 2013.

South African Supply Issues, Rising Demand Keys For Platinum

Melek looks for a roughly 425,000-ounce platinum deficit in 2013, while the consultancy IHS anticipates around 300,000. These forecasts use models that factor in projected investment demand.  Savant looks for a deficit between supply and fabrication demand alone of a little more than 300,000 ounces, meaning an even wider deficit if there should be net investment demand.

Several analysts cited production losses of some 600,000 ounces during 2012, largely due to safety stoppages at mines coupled with numerous strikes in South Africa. “We don’t think the market makes all of it up,” Melek said.

The labor unrest peaked in mid-August when police opened fire on striking workers at a Lonmin mine, killing more than 30. Workers eventually won pay raises, and strikes spread to other companies as workers there also sought better compensation.

“The Lonmin mine strike highlights the potential supply risks you have for platinum,” said KC Chang, senior economist who tracks PGMs for IHS. “About 75% to 80% of global primary mine supplies come from South Africa.  The economic and political risks in that nation directly influence platinum prices.”

Analysts cited the potential for unrest to flare again. “We look to the bi-annual wage negotiation season in Q2/Q3 as a conflict event for the industry, especially in this region of powerful labor unions,” UBS said.

There are also ongoing worries about sufficient electrical demand in South Africa. Power rationing back in 2008 led to reduced output and helped send platinum to its all-time highs. “They are walking a tightrope in terms of electricity supply,” Savant said.

Even without any major supply disruptions, the worries about this alone should help put a floor under the market, Savant said. Then, sharper price gains can be expected if there are major interruptions. “We’ve seen how PGM prices respond to South African supply disruptions, especially in 2008,” he added.

Further, as costs rise and prices remain below where they were a few years ago, producers may be guarded in undertaking new projects, meaning less supply for the future, analysts said.

Most analysts expect a rise in mine production in 2013, although a small one. For instance, IHS anticipates 2013 South African platinum output of 5 million ounces, which would be up from 4.9 million in 2012 but still below 5.3 million back in 2006.

A pick-up in economic activity would bode well for use of PGMs in auto catalysts. IHS projects U.S. light-vehicle sales will rise to 14.9 million units in 2013 from an expected 14.3 million in 2012. Chinese sales are projected to hit 20.5 million in 2013 after 18.8 million this year.

Melek looks for platinum demand for auto catalysts to rise roughly 100,000 ounces to 3.177 million next year. He also called for slight improvement in jewelry demand as the economy improves. “For net investment, we’re looking for a small increase of another 100,000 ounces in 2013 as well,” Melek said.

TDS looks for platinum to average $1,844 an ounce in 2013, while Commerzbank lists $1,875. Other forecasts include UBS, $1,740; Morgan Stanley, $1,715; IHS $1,700; Barclays Capital, $1,690; Societe Generale, $1,688; and CPM Group, $1,586.

Most expect prices to be higher during the latter part of the year than the early part.

Chang also looks for some of platinum’s support to come from demand for hard assets in general due to soft monetary policies around the world. “If you see people trying to diversify away from gold holdings, platinum would be the next precious metal added to their tangible-asset exposure,” he said.

Supply Deficit Also Expected In Palladium

Melek looks for an 876,000-ounce supply deficit in the palladium market during 2013.  Savant projects a 100,000 deficit between just supply and fabrication demand, meaning a bigger deficit if there should be strong investment demand. IHS envisions a roughly balanced market but one tilted toward deficit, Chang said.

Much of the world’s palladium also comes from South Africa, meaning the same constraints impacting platinum will also affect palladium. However, Russia is an equally important source of the metal. For a number of years, palladium from Russian state stockpiles helped the world meet its needs. The size of those inventories is not made public by the Russian government. Nevertheless, most analysts feel these stocks are about depleted, based trade data from Switzerland, through which much of the metal flows.

“What in the past has been an important pillar of supply will thus peter out once and for all,” Commerzbank said.

Between 2005 and 2010, Russia sold around 1 million ounces of palladium from its state reserves on the world market each year, Commerzbank said. Analysts said this fell to around 775,000 in 2011 and 250,000 in 2012. “We think it might be around 100,000 in 2013,” Melek said.

On top of this, Russian mining supply may face some constraints, Chang said. There may be less interest in ramping up nickel output due to lower prices than in the past, and this in turn would mean less palladium mined as a by-product of nickel.

Like platinum, palladium demand from the auto industry is expected to grow. Some say palladium use may grow more rapidly since this cheaper metal can be used with gasoline-powered vehicles that comprise the bulk of the auto markets in the U.S. and China. By contrast, platinum is used more heavily in diesel-powered vehicles, which are more common in Europe, where the economy has been crimped by the eurozone debt crisis.

Melek looks for palladium to average $874 in 2013, while Commerzbank projects $855, UBS $780 and Societe Generale $775. Other forecasts include Barclays Capital, $736; IHS, $680; and CPM Group, $645.

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

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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