There is strong evidence that both platinum and rhodium will go into a significant oversupply in the medium to long term, Credit Suisse Standard Securities precious metals analyst David Davis said today.
Platinum supply is expected to be outpaced by demand again in 2008 after moving into a deficit of 480 000 ounces in 2007 from a surplus of 335 000 ounces in 2006.
This is primarily due to production constraints such as power shortages in South Africa, where 80% of platinum is produced.
But the disinvestments in platinum ETFs (exchange traded funds) and the downturn inautocatalyst demand on the back of the global economic downturn is expected to suppress demand for platinum.
From next year platinum supply is projected to increase year-on-year, as ramp-up projects from existing mines and new junior mines are commissioned.
Added to this, Davis anticipates a rapid increase in secondary supply of platinum from autocatalyst recycling.
"Under these circumstances, supply begins to outstrip demand," said Davis, who was speaking at the South African Institute of Mining and Metallurgy's international Platinum Conference.
He added that the depth of the economic crisis and the latest fall in platinum prices may result in the market tipping into an oversupply position quicker than originally thought.
Davis said the driving forces likely to give rise to platinum and rhodium oversupply are the projected growth of South African mines, projected growth of global vehicle production and the projected growth in autocatalyst recycling.
"Our calculations in the short term indicate a platinum deficit of around 475,000 ounces in 2008 based on 1.4% global vehicle production growth in 2008 (compared with global vehicle growth of 5.1% and a platinum deficit of 480,000 ounces in 2007)," said Davis.
The annual growth in global vehicle manufacturing to a large extent governs the demand for platinum, palladium and rhodium used in autocatalysts.
"In the short term, much depends on the expected severity of the expected downturn in the global economy. The key question for global vehicle production in 2008 and 2009 is how much will vehicle growth slow down," suggested Davis.
He added that if precious metal prices remain suppressed, the platinum supply-and-demand dynamics would also change as a result of the increased demand for platinum jewellery form China and Japan.
"For now, we believe the South African platinum mining industry is expanding too rapidly, which will likely put platinum and rhodium supply into a surplus over the next five years and, as a consequence, negatively impact precious metal prices and companies' earnings," said Davis.
In his presentation titled A Mine Too Far, Davis said the current environment, where there was a shortage of skills, subprime fall-out, a downturn in global growth, and escalating costs together with suppressed metal prices, is not conducive to warrant capital expansion programmes.
Furthermore, with platinum and rhodium supply likely to be in surplus going forward (2009 to 2010), metal prices will remain suppressed until the supply-and-demand dynamics change.
Source: I-Net Bridge
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