The medium- to long-term outlook for plati- num remains positive from a demand point of view, notes integrated business enterprise Mitsubishi Corporation.

In its January 18 Precious Metals Weekly Update, the company highlights that 2016 will represent the first full year of Euro 6 emis- sions legislation being implemented across all vehicle models, which, in general, means an uplift to platinum loadings in diesel vehicles.

“From September 2017, a new on-road emissions testing system will be implemented with a particular focus on real world nitrogen dioxide emissions. Even though many automakers are choosing nonplatinum-containing urea-based selective catalytic reduction (SCR) devices methods for diesel nitrogen dioxide control, these systems are not suitable [for] smaller vehicles,” adds Mitsubishi.

This leaves automakers with a choice of fitting platinum-rich nitrogen oxide traps or hydrocarbon-based SCR, which requires higher loadings of platinum on the other catalyst components, including the oxidation catalyst and filter, to generate the right mix of gases for the SCR unit to function.

Further, during the Detroit Auto Show in January, German vehicle manufacturer Volkswagen (VW) announced that it will propose to the US authorities that SCR devices be fitted to around 430 000 vehicles affected by the company’s diesel emissions debacle.

The exclusion of platinum-group metals (PGMs) in the SCR devices is neither especially positive nor negative for platinum, says Mitsubishi, adding that, even if SCR devices replace platinum containing lean nitrogen dioxide traps (LNT) – which contain around 1 g of platinum each – this would only represent around 14 000 oz less platinum demand.

Although the company expects the actual figure is likely to be far less than that, since LNT devices were in the minority in terms of nitrogen dioxide-control solutions in the vehicle fleet and there is no guarantee that all 430 000 vehicles will have the SCR devices fitted.

Mitsubishi explains that, even if every vehicle manufacturer globally were to cease use of LNTs and adopt SCR devices on a net basis, this would reduce yearly platinum demand by 1% to 2%, which would probably impact sentiment much more than it would the actual fundamentals.

However, the company emphasises that there are “more ominous rumours” circulating that VW may buy back about 115 000 US vehicles (presu- mably those which cannot be retrofitted with SCR devices) which could result in greater volumes of platinum returning to the market for recycling. This new stream of platinum may exceed demand for platinum in replacement vehicles if new petrol models (with palladium-based emissions systems) are bought instead.

VW is known to have installed emissions cheating software in some of its vehicle, whereby emissions-reducing systems are switched off when these vehicles are not under laboratory circumstances. This cheating mechanism is used to circumvent certain emissions regulations in strict countries such as the US.

Pricing Predicament
An unusual divergence between gold and PGMs took place during the first week of January, with platinum and palladium prices plunging to new multiyear lows the week thereafter, Mitsubishi states.

Bullion was buoyed by a risk-averse mentality as global equities, led by China, plunged lower and geopolitical concerns from Saudi Arabia and Iran to North Korea came to the fore, in the first week.

“[During the same period] platinum and palladium reverted to their procyclical industrial roles, while gold and silver both benefited from safe haven buying,” states Mitsubishi, adding that platinum ended the first week of the new year modestly lower, diverging from gold as its industrial nature shone through amid general risk-off sentiment.

Platinum’s discount to gold widened to a new record of 23% after gold was supported by safe haven bids, while sentiment towards platinum remained negative amid a further slump in the Chinese economy and signs that the industrial sector in the US is undergoing contraction, with the addition of developments on VW’s emissions issue.

Renewed selling pressure saw platinum sink below $849 in the first week of the year, moving towards December’s lows. This was followed by platinum grin- ding down further towards the $800 mark, with little respite in prospect as the South African rand continues to weaken relative to the dollar.

“A 14-day relative strength index indicates that platinum is heading towards oversold levels but is not quite there yet.”

Earlier in January, current prices were technically in oversold levels on a 14-day relative strength index basis, implying that a near-term bounce higher is possible, perhaps back towards the 50-day moving average at $871, Mitsubishi reasones.

On January 18, the company said after giving up the 50-day moving average early last week, platinum had continued to slide downwards and had moved below last year’s low of $824.

“A reasonable demand-side response can be observed in the physical platinum trade in China, where Shanghai Gold Exchange turnover has increased 69% year-on-year in the first 12 trading days of 2016 on an average local price of 197 Rmb/g against 259 Rmb/g a year ago, but this, so far, has failed to arrest the price decline.

“Indeed it could be argued that things would have been even worse had Chinese opportunistic buying not been present.”

With the Chinese New Year on February 8, a key buying time for precious metal jewellery and investment products, demand ought to continue to be strong, says Mitsubishi. After that, without the cushion of seasonal Chinese demand, platinum could be lacking yet another element of support.

Palladium Performance
In January, palladium suffered its worst week since mid-November 2015 shedding almost $70, says Mitsubishi, adding that this positioned palladium below the 50% retracement of the 2008-low to 2014-high and implies further downside in future.

There is little support in terms of palladium supply. “While South African PGM production may eventually be curtailed in response to low prices, there is little sign of this yet, and Russian by-product palladium output is likely to be steady as a result of normal levels of nickel production,” the company calculates.

Mitsubishi adds that supplies of scrap palladium could further decrease in response to these low prices, but that eventually scrap dealers will have to release inventory to pay their bills.

“All of this paints a rather dismal picture for prices, though there are some positive factors in the form of upside risks from short covering or new opportunistic buying,” highlights the company.

These upside factors still seemed distant as at January 11– although “bearish bets in the New York Mercantile Exchange (NYMEX) speculative palladium futures market surged to a five-week high of 1.3-million ounces in January, at the fastest rate in six weeks. NYMEX shorts are not particularly elevated at the moment at 60% of the record high. Short term, the momentum could well be downwards,” Mitsubishi points out in its Precious Metals Weekly Update.

As expected, the latest NYMEX futures positioning data, as at January 18, showed a big extension in the gross short book, by 343 000 oz to 1.5-million ounces – a 28% week-on-week advance. With gross longs remaining pretty much flat, this left the net long book at just 10% of the all-time high and in danger of going net short.

“Uncommitted shorts are likely to have sought cover in the last few days, lowering the gross short position from the elevated 76% of the all-time high seen as of January 12, while there could have been an element of new long positioning helping drive prices higher. Exchange traded funds have continued to shed metal, losing around 1% of the total volume in the first two weeks of the new year,” Mitsubishi adds.