Investment demand will likely be bolstered by the current low platinum price coupled with the positive fundamental outlook
Nuggets from the World Platinum Investment Council (WPIC) Q2, 2021 Report
by Dr. David Davis Platinum Demand Strengthening
- The supply / demand dynamics for platinum going forward point to strong demand growth and constrained supply.
- Second-quarter global platinum demand was 23% or 1,907,000oz higher, with demand in 2021 forecast to increase by 1% over 2020 to 7,753,000oz.
- Automotive demand jumped 75% or more than 285,000oz year-on-year in the second quarter as global light vehicle production recovered from the pandemic. Had it not been for car production stoppages around the world, caused by the peristing shortage of semiconductor chips, demand for platinum would have been higher – by an estimated 50,000oz.
- Second-quarter industrial demand rose 46%. It was only expected to increase by 25% or 493.000oz in 2021.
- Platinum petroleum demand more than doubled in the second quarter, chemical demand was up 83% and glass demand rose by 39%.
- Demand from the electrical segment rose by 19% (+6 koz) year-on-year, due to the rebound of HDD shipments and gains in semiconductor applications, aided by the lower base last year.
- Investor demand halved compared to the previous year. This reflected easing in both exchange warehouse inflows and sharply lower inflows into ETFs. Finally, strong bar and coin demand in North America was offset by heavy liquidations in Japan leading to a 10% (-12 koz) decline in bar and coin demands vs Q2, 2020. Notwithstanding, WPIC indicates that any investment demand over 300,000 oz for bar and coin is particularly strong and demonstrates that retail investors still demand hard assets.
- Global mine supply jumped 65% (+615koz) year-on-year to 1,557koz
- South African output jumped 124% (+644koz) year-on-year due to Anglo American Platinum Converter Plant’s (ACP) return to full operations following the shutdown in Q2, 2020. Supply was also boosted by a faster-than-anticipated processing of a backlog of material that built up while the ACP plant was out of commission last year.
- The increase in supply however, can be described as a transitory effect. Without processing this backlog, the mining output level would have been below that of 2019.
- A strong recovery in mine production and modest growth in recycling will see total supply rise by 17% (+1,132koz) to 7,943 koz. As a result, 2021 is forecast to generate a surplus of +190koz compared to the deficit of -883 koz in 2020, as the latter was driven by investment inflows of 1.6moz which contrasts with the forecast investment total of 521 koz for this year.
- The strong demand for PGMs is inextricably linked to climate change.
- Vehicle emission standards have been progressively tightened through worldwide regulation since 1970. These increased regulatory standards require higher PGM catalyst loadings, particularly in heavy-duty vehicles
- Tighter emission standards for heavy duty vehicles will likely increase demand by X5 higher in 2023 than 2020 in China and India (Amplats).
- Demand from petrol substitution and the hydrogen economy will also drive the supply and demand deficit.
- Price mismatches between palladium and platinum will also likely drive substitution in the catalytic convertor and increase demand.
- Platinum mine supply depends heavily on the South African PGM mining industry, which supplies about 72% of global platinum. Russia, North America and Zimbabwe supply around 12%, 6% and 7% respectively (JM 2019).
- South African platinum supply will likely decline by a CAGR of -1.4%. The gradual decline in the supply of platinum is attributed mainly to the historical evolution of the mining mix ratio of the PGM reefs in South Africa and underinvestment in the industry.
- The decline in South African mine supply will likely amount to around 250koz by 2025.
- The continuity of South African PGM supply is not secure. The risk has heightened. The South African PGM mining industry has faced numerous challenges in the past caused mainly by the combined effects of electricity shortages (load shedding), prolonged industrial action, political upheaval, increasing costs and a significant reduction in capital expenditure.
- Since 2007, South Africa has faced ongoing periods of widespread rolling blackouts (load shedding) as electrical supply continues to fall behind demand, threatening to destabilise the national grid. The situation, some 14 years later, has reached “crisis levels”.
- PGM supply from South Africa will probably start to decline within the next 2 to 3 years when higher levels and frequency of load shedding are likely to persist, including Stage 6 and above ceteris paribus. (NB: Stage 6 and higher would cause mine operations to cease).
Future Supply & Demand:
The progressive tightening of environmental regulations and technology innovation surrounding the production of green hydrogen has led to and will continue to lead to, an increase in PGM demand. Coupled with the supply-side restraints, caused mainly by the decline in South African mine supply and the energy crisis, will almost certainly cause a major price resolution in Platinum.
While South Africa’s PGMs continue their decades-long task of cleaning the air of the world’s cities in the autocatalytic convertors of vehicle exhausts, their elevation to an even higher zero-emission role inside fuel cells and gren hydrogen electrolysers has begun.
Furthermore, investment demand will likely be bolstered by the current low platinum price coupled with the positive fundamental outlook.