Mining Weekly

JOHANNESBURG (miningweekly.com) – The World Platinum Investment Council (WPIC) today publishes its Platinum Quarterly for the fourth quarter of 2022, full year 2022, and a revised forecast for 2023.

After two years of significant surpluses the platinum market is forecast to move to a material deficit in 2023. The change from the 776 000 oz surplus in 2022 to the forecast deficit of 556 000 oz in 2023 is over 1.3-million ounces. This reflects total supply remaining close to the weak level in 2022, up only 3% to 7 428 000 oz and strong demand growth of 24% to 7 985 000 oz.

“The main driver really for the deficit projected for this year is a combination of very muted growth in supply, principally due to the power challenges facing South Africa, as well as some of the sanctions against Russia, which are creating operating challenges there.

"In combination with that is an extremely robust outlook in terms of growth. Supply in aggregate – mining plus recycling supply – is only expected to grow by around 3%, whereas we're projecting demand growth at 24% year-on-year, which is particularly strong,” WPIC director of research Ed Sterck told Mining Weekly in a Zoom interview. (Also watch attached Creamer Media video.)

Mining Weekly: The Platinum Quarterly reports that investment demand will improve by more than 900 000 oz this year. On what is the improved investment forecast based?

Sterck: It's a combination of things. Partially it's because we saw net disinvestment in 2022 and that was on what was pretty robust bar and coin demand, more than offset by exchange traded funds (ETF) disinvestment. We saw, in total from the middle of 2021 to late 2022, almost 900 000 oz of platinum come out in the platinum ETFs globally. We also saw some significant exchange stock outflows of almost half a million ounces in that same time period, so total disinvestment from financial assets getting on for one and a half million ounces. It's important to just unpack that a little bit and try and understand what was driving the disinvestment. In terms of ETFs, it's partially macro asset allocation decisions.

ETFs are a non-yielding asset. We've seen rising real interest rates and so there's been a hunt for yield amongst investors, which ETFs don't really supply, and so that's been a factor behind some of that disinvestment. But added to that, the platinum forward and futures markets were in backwardation for much of that period. If you are an asset class agnostic investor – admittedly most investors aren't asset class agnostic – but if you do have that flexibility, then you can move your platinum exposure in the ETF, where you're typically paying half a percent a year for that ETF exposure, into the forwards and futures market, when because of the mechanics around it being in backwardation, you're effectively being paid to hold that position. That was also probably a factor behind the ETF disposals.

In terms of the exchange stocks, that's largely a function of the platinum market, having the platinum yield being at pretty elevated levels throughout most of the time period we're talking about. So, again, rather than holding platinum on exchange, where you're not attracting any income on those platinum holdings, you can wean them off exchange and potentially lend out those platinum ounces and benefit from the high yield rates. That was behind the exchange stock outflows.

Looking into 2023, the platinum market is back in contango. If you look at the economic outlook, we do see continued real interest rate rises but at a slowing pace, and then possibly reversing later this year. In terms of exchange stock outflows, yield rates have fallen somewhat, but they do still remain elevated. Fundamentally, and possibly more importantly, in terms of the minimum levels that exchange stocks can reach, they’re back to their pre-Covid average historical levels and for the ongoing functioning of the exchanges, it seems unlikely that they can be allowed to fall too much further.

Coming back to the question of the 1.3-million-ounce swing in investment ounces between 2022 and 2023, a big factor is we think that the ETF disposals are likely to be significantly reduced, exchange stock outflows have pretty much run their course, and at the same time we're expecting strong bar and coin demand at around from 150 000 oz for 2023, so a big improvement in net investment numbers.

Increased platinum for palladium substitution and higher loadings are expected to lift automotive demand by 10% in 2023. How much palladium substitution is expected and what is the latest on emissions legislation and higher platinum loadings?

Platinum substitution is a big, important driver. I'd argue that the platinum substitution for palladium in gasoline vehicles is a bigger factor in the outlook for platinum demand from the automotive industry in 2023 than vehicle production numbers. In terms of the level of substitution we're talking about for this year, it's moving up from around 440 000 oz last year to almost 550 000 oz in 2023, so quite a big increase in terms of substitution numbers, and that's primarily in gasoline vehicles.

You've also got higher loadings. That's largely in the heavy duty segment, and it's due to the final implementation of the China 6 legislation. In terms of vehicle production numbers for internal combustion (ICE) engines, we're actually expecting a small decrease in ICE production year-on-year, so the increase in platinum demand is really on those substitutions and higher loadings. If we look beyond just this year, that platinum substitution for palladium trend is expected to continue. So, for as long as there's that ongoing price differential between platinum and palladium, there's an economic incentive there for the automakers to continue to make that switch – and remember that this substitution is occurring on new models.

As new models are developed, it's pretty easy to make changes to the balance between the different platinum group metals (PGMs) in the exhaust treatment system. Once that new model is launched, it's typically locked in for the seven-year life of that model. Any substitution that's occurring now is going to be a factor for a number of years to come. In terms of the emissions standards and what we can expect in the future, there's a lot of talk around Euro 7 coming in at some point later this decade, and what that might mean in terms of higher PGM requirements for the exhaust treatment systems. That's still being worked out, but there’s certainly a fair amount of opposition that's been publicly spoken about in the press to bringing in some of those measures. The European Commission has also left itself scope to manoeuvre on that, and indeed, even the ability to postpone implementation of those tighter emission standards, or to soften them.

Industrial demand in 2023 is set to increase 12% year-on-year, almost matching its strongest year on record. What are the main drivers of industrial demand and is this level of demand sustainable?

That's a good question. Industrial demand is a little bit different to the other end demand segments in that whilst there is ongoing consumption of platinum, there's a lot of internal recycling. The year-to-year incremental demand requirements are typically pretty small in an ongoing operation, simply replacing the losses that occurred during the manufacturing process of the various different products that use platinum in their manufacturing methodologies.

The big drivers on a year-to-year basis in terms of platinum demand are capacity additions. That's when a new plant is constructed. It is populated with the platinum required in order to operate and then, on an ongoing basis, it's only really the losses that are replaced. It just happens that in 2023, we're expecting some fairly substantial capacity additions in particular in the glass sector. The last strongest year on record was 2021 and, again, the high demand in 2021 was driven by glass capacity additions. We saw much fewer of those in 2022 and that resulted in a fairly significant decline in industrial demand for platinum last year. But again, we're seeing more of those come through in 2023 and we're approaching the second-strongest year on record and very close to being the strongest year on record.

How likely is that to happen? Well, remember these are large capital projects, so they're substantially already committed to, and in many regards, probably already substantially complete from a construction perspective, and certainly, they’ll be well advanced in their planning procurement. In the near term, we'd say that industrial demand outlook is pretty well locked in. It's worth bearing in mind we do have a fair degree of economic uncertainty in the world at the moment. How's that going to manifest in terms of the impact on platinum demand in the future? Well, for industrial demand, we think the near-term risks are pretty low, because so much of that demand is already committed to. But if we do see a long, sustained period of economic uncertainty or recession, then, in terms of industrial demand, the impact will be felt probably two to three years out. But as things stand at the moment, most economic commentators would say we're possibly beginning to get out of the woods, and although the chances of recession haven't dropped to zero by any stretch of the imagination, they've certainly pulled back from the very high levels that were expected earlier this year.

What is on the cards for platinum jewellery as Covid restrictions ease in China?

We've got a fairly significant year-on-year increase of around 15% in terms of platinum jewellery demand in China in 2023. That's off a base in 2022 that was quite heavily impacted by both Covid restrictions and then by the end of Covid restrictions. It is a reasonably good increase but it still remains well below long-run historical demand levels in China, which has typically been the most important market globally for platinum jewellery demand. Thinking about the medium to longer term outlook for platinum jewellery demand in China, we've seen a fairly steady trend over a number of years of it gradually ebbing away due to competition with other segments, other luxury goods items. Without a sustained improvement in terms of the consumer tastes for platinum there, the best we can probably expect is a stabilising of the outlook, and that will be our base case forecast at this point in time.

Massive imports of platinum into China have been observed since 2021. What should be read into China’s decision to ensure that it has a good supply of platinum?

It's really interesting. As you said, there have been substantial imports into China, well in excess of identified demand. That's resulted in an accumulation of above-ground inventory in China. When you look at what's happened on a global basis, that above-ground inventory in China has all been sourced from the West, so we've effectively seen platinum above-ground stocks move from the West and into China. Now, China has some pretty rigid export controls for strategic minerals, which includes PGMs. Once that metal is in China, it's very difficult to bring it out again, so if we do see the deficit that we're forecasting for this year come to fruition, it's going to be felt more deeply in the West than it would be in China, where they have accumulated these strategic reserves.

What's been the driving force behind that accumulation?  Well, it's hard to know for certain but we can theorise. One possible aspect of it could be that real demand in China has been higher than we've been able to identify. For the last few years, travel in China has been somewhat limited or very, very difficult indeed due to the Covid restrictions, so it's quite possible that there has been some real end consumption that we've not been able to see. But equally, it could also be that demand expectations in China for the future are much higher than we're currently projecting.

Arguably that would be most likely linked to the hydrogen economy in future. China could be the operators of hydrogen projects, or planned operators of hydrogen projects, and could be looking to accumulate platinum in advance of that. The other more prosaic answer could simply be that existing users of platinum in China – the industrial, automotive users – are looking at the outlook which is one for a deficit this year, and they might be expecting deficits for 2024 and beyond, and simply saying to themselves, well, I know that I'm going to need platinum, I can buy it now relatively cheaply, and I can keep it for my needs in the future, and I know that I'm going to be well protected, because if we do see deficits come to fruition, that will be reflected in market prices.

As demand for hydrogen becomes meaningful, could platinum become a proxy for investors looking for exposure to hydrogen?

That's certainly possible and the reason that I say that is because there are no other commodities I can think of that are direct contributors to the production of hydrogen, where it could become such a meaningful source of energy demand for that commodity, that they become intimately linked. If we look a long way now, we're talking about a hydrogen economy that is growing off an extremely small base today, so we're really talking about going into the latter part of this decade or into the 2030s. By around the middle of the next decade, it's quite possible in our projections that hydrogen demand for platinum could equal automotive demand today, for example.

Exactly when in the 2030s that happens is dependent upon the pace of fuel cell electric vehicle uptake. But at that point, or even in the approach to that point, in a market that's looking tight, where the marginal source of end demand is coming from the hydrogen economy, and that’s where prices are being set, then you could argue that platinum makes an excellent proxy for hydrogen. Remember that investors can't invest in hydrogen as a commodity directly. There aren't really any opportunities to do that today, so they have to invest in proxies, either in equities of the companies associated with the hydrogen industry, or in the future, arguably platinum could fulfill that role where hydrogen demand for platinum becomes meaningful enough to be a price setting mechanism for part of the processing equation for platinum, and therefore ebbs and flows in the demand, or the production of green hydrogen, become key in terms of price setting platinum, and the proxy status is established.

SUPPLY OUTLOOK

Supply is forecast to remain broadly flat in 2023, with refined mine production in 2022 also down 11% year-on-year at -718  000 oz, owing almost entirely to lower output from South Africa.

South African output declined 24% in the last quarter of 2022 and Russian production by 10% year-on-year and 2022’s global recycling was 17% down on reduced availability of end-of-life vehicles and lower jewellery recycling.

Autocatalyst recycling declined as a result of new vehicles’ low availability, meaning cars are being driven for longer. This was compounded by changes in consumer behaviour as a result of cost-of-living concerns and lower mileage due to remote working.

Jewellery recycling was down on slower jewellery sales in China impacting sell-backs. Global recycling is expected to recover by 10% to 1 856 000 oz this year, and autocatalyst recycling by 12% to 1 391 000 oz.