Both platinum and palladium are expected to end 2011 in surplus

Despite growing demand in most sectors, both platinum and palladium are expected to end 2011 in surplus but platinum demand is forecast to decline in 2012 and remain in surplus while the more industrially-driven palladium market will rise, resulting in a deficit next year.Those are among the conclusions of the “Platinum 2011 Interim Review” issued Tuesday by platinum group metals specialist Johnson Matthey PLC. Gross demand for platinum is forecast to rise 2% to 8.08 million ounces in 2011, close to pre-recession levels. That demand will rise be more than matched by increased supplies and recycling so that the overall platinum market will end the year in a small surplus of 195,000 ounces, Johnson Matthey analysts said.

Meanwhile the palladium market is forecast to be in surplus by 725,000 ounces in 2011, but only because of another year of sales from Russian state stocks. Without shipments of state stocks this year, the palladium market would essentially be in balance showing growth in newly mined supplies and rising autocatalyst and industrial demand, while investment and jewelry demand is softer, the analysts said.

Supplies of platinum are expected to increase by 6% to 6.4 million ounces this year, with most of the growth coming from countries other than South Africa. Although shipments from South Africa will rise modestly to 4.78 million ounces, underlying production is weakening. Additional supplies are also predicted from North America as producers recover from strikes and shutdowns and from Zimbabwe where new capacity has come on-stream. Russian supplies are expected to be flat at 825,000 oz.

Robust Autocatalyst, Industrial Demand

Gross demand for platinum is being driven this year by robust demand for platinum in autocatalysts and growth in demand in industrial applications such as glass and petroleum refining. This demand should result in purchasing at levels not seen since 2007, before the global economic crisis, the analysts said.

Demand for platinum in autocatalysts should increase by 3% to 3.16 million ounces this year, driven mostly by higher production of heavy duty diesel vehicles in Europe and North America. Disruption caused by the Japanese earthquake in March 2011 affected purchasing of platinum by domestic manufacturers in Japan and in transplants elsewhere, however. In Europe, despite growth in light duty vehicle production, platinum demand is expected to weaken slightly to 1.48 million ounces as further substitution of platinum by palladium takes place.

Purchasing of platinum for industrial applications is forecast to reach a record high of 1.96 million ounces. In the glass sector, demand will rise by 13% to 435,000 ounces as platinum alloy melting tanks are installed for LCD glass manufacturing. Construction of new refining capacity will lift platinum demand in the petroleum industry by 24% to 210,000 oz. Chemical and electrical demand are also predicted to be strong.

Gross demand for platinum in the jewelry sector is forecast grow modestly and end the year marginally higher than in 2010 at 2.47 million ounces. “In China, we predict that gross platinum jewelry demand will rise by 2% to 1.69 million ounce,” the analysts said in a statement, while adding that robust demand for platinum is also expected in in North America and Japan. But demand is expected to soften in Europe due to higher prices and a move towards lower weights of individual jewelry pieces, they said.

Identifiable net physical investment demand for platinum is expected to decline year-on-year, although demand will remain positive at 495,000 ounces with healthy levels of Japanese investment bar purchasing and investment in platinum exchange traded funds (ETFs) being recorded, the analysts said.

2012 Outlook Softens

“The world economy looks set for a period of slower growth in 2012, with consequently lower consumption and potentially lower demand for platinum in industrial applications,” the analysts said while noting that technology changes in light duty European autocatalysts and a return to full production levels in Japan should lead to higher autocatalyst demand.

If the current gold price premium to platinum is maintained, that could also spur further increases in platinum demand by jewelry manufacturers, they said. “With supplies expected to remain largely flat, we predict the market will remain in surplus again in 2012 but not by a significant amount,” they said, adding that platinum should trade on average at $1,650 per ounce in the next six months and could trade as high as $1,800. Physical buying is likely to put a floor under the price at $1,450, they said.

Supplies of newly refined palladium are expected to increase by 5% to 6.67 million ounces in 2011. These supplies will be supplemented by sales from Russian state stocks of 750,000 oz, bringing total supplies to 7.42 million ounces, a similar level to those in 2010, the analysts said

Growth in vehicle production in Europe and North America in the first half of the year is expected to drive palladium demand in emissions control to historic highs of 5.92 million ounces in 2011, a 6% increase compared with 2010. More stringent emissions standards which came into force this year in China have resulted in higher demand for palladium in gasoline autocatalysts, despite a slower rate of growth in automotive production in that country.

Industrial Demand High

Industrial demand for palladium is forecast to rise by 7% to reach pre-recession levels of 2.65 million ounces. Demand in the electrical sector is set to remain strong as sales of new computer equipment stimulate the manufacture of palladium-containing components. Demand for palladium process catalysts in the chemical industry should also rise, driven by downstream demand for packaging and textiles, particularly in Asia.

Gross demand for palladium jewelry is set to fall by 8% this year to 545,000 oz.Higher prices and weaker consumer sales have led some manufacturers to stop producing palladium jewelry in China, the analysts noted. Palladium demand is expected to remain robust in Europe where it has a niche in the men’s wedding band sector.

Investor sentiment has also been less enthusiastic for palladium this year, with net liquidation in the ETF investment market in the year to date. Net investment demand for 2011 is forecast to be negative by 215,000 oz.

The palladium market is forecast to move into fundamental deficit in 2012 as supplies of palladium are forecast to be tighter overall due to lower sales of Russian state stocks partly offset by slightly higher shipments from South Africa.

“With the investment and jewelry sectors representing a much smaller share of palladium demand than pre-2011, the palladium market will be more industrially-driven next year,” the analysts said. “Overall demand in the autocatalyst and industrial markets is expected to rise, although the possibility remains that lower consumer spending could have knock-on effects on purchasing in some regions.”

These positive supply-demand fundamentals should be supportive of the palladium price, which Johnson Matthey forecasts will trade between $500 and $800 per ounce, and on average at $650, in the next six months.

The Johnson Matthey review also looks at other platinum group metals including rhodium, ruthenium and iridium. The rhodium market was seen in surplus again this year by 123,000 with supplies expected to grow by 5% to 768,000 ounces and gross demand increasing 18,000 ounces to 905,000 ounces. Demand for ruthenium was expected to soften to 811,000 ounces and iridium demand was seen remaining solid at 342,000 ounces.

Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted at pburgert@resourceinvestor.com.