JOHANNESBURG (Classic Business Day) -- Precious metals consultancy GFMS releases its Platinum and Palladium Survey 2007. Classic Business Day gets Dr. Paul Walker from GFMS on the line from London about the market’s outlook.
GIULIETTA TALEVI: The platinum price is around $1,300 an ounce and it’s boom time for platinum group metals (PGMs) producers. Paul, something that caught my eye was news that auto-catalyst platinum demand has reached a new record high despite these record prices. I guess that’s very good news for platinum producers going forward?
PAUL WALKER: I think it is, and if you look probably two, three or four years out auto-catalyst demand is very price inelastic, and there’s a growing market for it with real strength in diesel. There’s been some substitution pressure away from platinum to palladium in the auto-catalyst sector, but in the main what’s really driving this is very robust auto-catalyst demand, it’s price inelastic, and you have to have it in a car and with the environmental legislation getting tighter and tighter in virtually every jurisdiction, including places like India and China. Given that one assumes motor vehicle production is going to continue platinum demand is going to go up with that.
GIULIETTA TALEVI: You mentioned palladium, and that there may be a little bit of switching out of platinum into palladium - I suppose there’s been similar demand for palladium?
PAUL WALKER: True. We saw for the first time in five years that palladium auto-catalyst demand is coming back, and that’s’ rising year-on-year as a function of the substitution effect. Palladium is starting to make a little bit of an appearance in the diesel sector - which was traditionally wholly a platinum sector - so the outlook for auto-catalyst demand in palladium has been pretty positive as well. Again assuming that one believes that global macroeconomic demands for motor vehicles is going to be on the rise for the foreseeable future all of the major jurisdictions are seeing increasingly onerous environmental legislation, and that means both platinum and palladium all things being equal are going to grow.
GIULIETTA TALEVI: A negative of higher platinum prices is the effect that’s had on jewellery fabrication - how have prices affected jewellery demand in 2006 and into 2007?
PAUL WALKER: Not surprisingly platinum demand came off globally around 8% in our estimates, but what’s been interesting in markets like China and Japan that have seen the biggest hits - those were the biggest markets, and that’s where the biggest declines have been recorded over the last few years - it seems like it’s starting to bottom out. I think the really price-sensitive part of that demand has been driven out quite some time ago, and the aspirational element of platinum jewellery is still asserting itself and people are willing to pay a premium to have those metals. But it has gone down, and certainly if prices move in the direction that seems probable - given our gold price view, and the strength of demand for platinum - prices are likely to go up if anything, and that will continue to exert pressure on the jewellery sector. One thing to bear in mind in the jewellery sector is it’s not just resistance at the consumer level we are seeing - there are problems from higher prices all the way through the value chain from the manufacturers to the wholesalers, and how they fund this business. It’s really created some difficulties in the value and the supply chain for platinum jewellery - and that’s one of the reasons demand has come off, so it’s not purely consumer driven.
GIULIETTA TALEVI: Where does price resistance really start in the value chain?
PAUL WALKER: That’s a good question. If we have a look at what happened in China for example the manufacturers tend to fund the entire pipeline - that’s from buying the raw metal, transforming it into jewellery, and then delivering it to either wholesalers or retailers around the country. Having to fund that entire value chain they found the increasing price puts balance sheet pressure on them - they don’t have the cash to fund it. Where they could fund 100 kilograms of platinum at $500 an ounce they can only fund half that at $1,000 an ounce. That’s created real problems for them in terms of innovation and design, and getting product out to the markets in China. In Japan it’s probably more a case of consumer resistance - consumers starting to look around for cheaper alternatives, and especially for non-aspirational buying like a casual piece of jewellery where there’s been a shift into things like white gold.
GIULIETTA TALEVI: I’d imagine the aspirational and exclusive element of platinum jewellery is a factor in demand?
PAUL WALKER: Absolutely right, and that will continue no doubt. All other things being equal people aspire in markets like Japan when it comes to a wedding to have platinum, but there does come a time when the price reaches such high levels that at the bottom of the market people are moving into white gold in the bridal sector. So there are competing metals out there, and platinum has to compete even if it’s the most desirable - so if the price moves completely out of alignment with budgets there’s going to have pressure on offtake.
GIULIETTA TALEVI: Should platinum producers be concerned about the fall in jewellery demand, or are they more than compensated by demand coming through for auto-catalysts?
PAUL WALKER: There’s a curious juxtaposition - the nice thing about the jewellery sector is it’s always acted as a shock absorber for the market, where if the price goes down demand is expected to go up and vice versa - but certainly on the platinum side of the market the price-sensitive elements have been squeezed out, and that’s primarily jewellery. We’ve reached the stage now where I guess there’s a curious danger of prices ratcheting up very sharply because it’s a relatively illiquid market - people have to have these metals in their cars to get them into the marketplace. Lurking in the back of their minds there’s probably the feeling that this is getting into dangerous territory, because in an illiquid market like this if there’s an increase in demand that could see prices ratcheting up very sharply, and then substitution pressures looking for alternatives really kicks in. So there’s a curious juxtaposition on this - in some respects it’s positive, but in the longer-term there’s the niggling doubt that it may be a little negative.
GIULIETTA TALEVI: What the GFMS forecast for 2007 for the platinum price?
PAUL WALKER: We’re are bullish - certainly something in the region of $1,450 an ounce and possibly even higher is likely. I have tell you that this is premised partly on the gold view that we have - we are very bullish on gold. We believe the precious metals complex on the whole will rally on the back of higher gold prices, and the price inelastic elements of platinum demand, and relatively tight market balances and lack of stock should see the price move to the upside. The downside risks are relatively limited at this stage - I would say that on a balance of probabilities the risk is more on the upside than on the downside.
PGM Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
