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Silver to move sideways, while new palladium uses temper platinum outlook

2nd March 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – The strength of the US dollar has been undermining prices for silver, platinum and palladium in recent months, but despite new industrial applications and speculative investment interest, the three precious metals have different market circumstances and divergent outlooks.

London-based Thomson Reuters analyst William Tankard on Sunday told delegates attending the world’s largest mining-industry trade show, the Prospectors & Developers Association of Canada’s yearly convention, in Toronto, that the US dollar had strengthened by 18% since January last year, pressuring the silver price to drop 17% in the period and platinum to decrease by 15%, while palladium, despite being exposed to downside potential, had bucked the trend to gain 12%.

SIDEWAYS SILVER
Silver, a versatile metal, had seen a significant increase in its industrial and fabrication uses, accounting for 53% of the market demand in 2014, while demand for identifiable investment purposes also rose.

On the contrary, silver’s use in the photography industry had decreased significantly in recent years.

Meanwhile, mine output’s share of supplying the market had risen sharply from 70% to 84%, mainly in response to the record prices of more than $44/oz in 2011, as well as owing to more coproduction from gold, lead/zinc and copper mines.

Tankard noted that contrary to expectations, there had not been a supply-side reaction to the low-price environment experienced from 2013 onwards, with miners instead opting to lift the cutoff grades of their operations in pursuit of reduced costs, while also reining in other expenditures such as exploration.

This created a softer price outlook for the metal.

From 2011, the dollar value of total silver holdings for visible investment purposes declined in pace with the lower silver prices; however, the analyst pointed out that physical demand had been rising, with exchange traded funds (ETFs) holding a steady volume of the grey metal in recent years.

Speculative interest and ETF demand had risen to historic highs.

Tankard said the low prices were expected to drive demand for discretionary spending on silverware and jewellery; however, these were not seen as price drivers in the short term.

Tankard expected the silver price to average at $16.50/oz this year. Early on Monday morning, silver was trading upward at $16.69/oz.

TRANSITION METALS
Regarding the six platinum-group metals (PGMs), Tankard noted that 2014 should have gone down in history as the year in which supply-side woes dominated the market, but perplexingly enough, it did not.

In South Africa, which accounted for about three quarters of the globe’s platinum mine output, three of the most significant producers of the precious metals, including Anglo American Platinum, Impala Platinum and Lonmin, suffered five-months-long industrial action, which resulted in about one-million ounces of platinum being removed from the more-or-less seven-million-ounce market.

Tankard pointed out that despite the three strike action events of 2012 having each added about $100/oz to the platinum price, when the more dramatic events of 2014 unfurled, the price remained steady.

He pointed out that South Africa’s platinum output had dropped to a shade above three-million ounces a year in 2014 from four-million ounces a year previously, with some production recovery expected this year.

Further, scrap supplies were also expected to rise this year.

ETFs had shown some interest in platinum, especially during the South African industrial action, but sold off most of their holdings after the strike ended. ETF holdings in palladium were on the rise.

Platinum’s main uses comprised Chinese discretionary spending on jewellery and European auto catalyst manufacturing in the diesel sector. Palladium was preferred for the manufacture of auto catalysts for gasoline vehicles, led by the North American and to a lesser extent European markets.

However, cheaper palladium has made inroads into the  diesel market in recent years. Adding to platinum’s weaker outlook was lower Chinese discretionary spending on jewellery.

COST CRISIS
Tankard noted that the platinum industry was currently treading water and was in an unhealthy state regarding its cost structure.

He said the devaluation of the South African rand from 2013 onward had provided only partial relief to producers' dollar costs, due to aggressive rand-denominated cost inflation. The average South African platinum producer’s all-in costs have soared and were now playing catch-up with that of North American producers. All-in costs had, on average, risen to $1 672/oz of platinum, while the platinum spot price currently stood at $1 189/oz.

There were also other factors weighing on platinum, with producers and consumers having built up considerable stocks. Despite the above-ground stocks having been drawn down during the South African industrial action, stocks remained high, while auto catalyst demand remained weak. Jewellery demand was seen as only a ‘price taker’.

Tankard suggested the PGM market could expect further production cuts in South Africa this year, unless the price improved to support companies current production plans.

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Edited by Tracy Hancock
Creamer Media Contributing Editor

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