World Platinum Investment Council Director of Research Trevor Raymond
JOHANNESBURG (miningweekly.com) – Many things could play out next year that have the potential to materially reduce the substantial platinum surplus that the World Platinum Investment Council (WPIC) is forecasting for next year, Mining Weekly can today report.
Among these is the very strong current importation of platinum into China, which is described as being significantly above identified demand.
In a Zoom interview to coincide with the publication of WPIC’s third-quarter Platinum Quarterly, WPIC Director of Research Trevor Raymond said that the stripping out of backlog material from the projected surplus points to refined production falling below the 2019 level, resulting in end-2022 supply being constrained at a time when demand will likely be particularly strong. (Also watch attached Creamer Media video.)
Many investors are reportedly looking at 2023 supply being really tight and an explanation of changed China imports potentially turning the surplus on its head.
That is seen as the driver of the current growth in exchange-traded fund (ETF) demand in North America and Europe.
Part of what lies behind these surplus-reduction projections is a sense that platinum is perhaps not as readily available as might be imagined.
The current strong imports into China are significantly above identified demand, with the substitution of platinum for palladium perhaps being considerably higher than has been identified, together with particularly heavy-duty vehicle platinum loadings in China being possibly much higher than thought.
The explanation of where additional imports of platinum into China are being used is expected to come through in the next while, with platinum surpluses meanwhile being forecast for 2021 and 2022.
WPIC's Platinum Quarterly reported that global third-quarter platinum demand for the total of automotive, jewellery and industrial applications continued the positive year-on-year growth trend seen in the previous three quarters, but negative investment demand and near-record refined supply drove the market balance into a surplus of 592 000 oz this quarter. The forecast for 2021 is now revised to a surplus of 769 000 oz, while the 2022 surplus is forecast to be 637 000 oz.
There are, however, numerous things that could change the certainty around the estimate of that surplus, with increased rates of substitution in China and North America certainly considered to be part of that. In addition, China perhaps elevating its loadings of around 3 g per heavy-duty vehicle to the level of the 20 g North American and European heavy-duty truck loadings almost explains the import surge.
Automotive platinum demand is set to grow by 14% or 340 000 oz in 2021, supported by both higher platinum loadings in autocatalysts to meet tightening emissions legislation and the substitution of platinum for palladium, which is estimated to be just over 200 000 oz this year.
Bar and coin investment is expected to reach a 365 000 oz in 2021 with 2022 demand expected to rise by 10% to 402 000 oz, driven predominantly by increased retail investor buying in North America and Japan. This year’s industrial demand is expected to increase by 26% or 514 000 oz.
Mining Weekly: You’re forecasting a surplus for this year and next. But you also reveal that there are factors that point to platinum being far less freely available than the forecast surpluses might suggest?
Raymond: We had a dramatic third quarter. We certainly had a boost in supply from backlog material. We had the semiconductor crisis reducing metal sales, so a very big surplus in the quarter, this year and next year. But the market seems to be contradicting that. We’ve got the platinum price very well supported at $1 000/oz. We’ve got the platinum lease rate much higher than the pre-Covid level and there are still people in the physical metal market that are using the futures market as a source of supply. So something does seem to not quite stack up.
Mining Weekly: What are the areas of potential upside for platinum that are not reflected in the 2022 forecast?
Raymond: We think part of what’s behind the fact that maybe platinum isn’t as readily available as one might imagine is that there have been very strong imports of platinum into China. The platinum imports are significantly above identified demand. We think substitution of platinum for palladium may well be a lot higher than has been identified. We certainly think that the loading on vehicles, particularly heavy-duty vehicles in China is much higher. We think that explanation for where that metal that’s going into China is being used should come through in the next while, but obviously the data today is reflecting those surpluses.
Mining Weekly: Do you expect platinum’s decarbonisation role to continue to increase investor awareness in platinum?
Raymond: Yes, decarbonisation has been a theme for a while but I think we've just had COP26 in Glasgow and I think there has been global commitment to addressing climate change and certainly the use of hydrogen to decarbonise, the use of hydrogen to replace the reliance on fossil fuels was very strong. Platinum is used in electrolysers to produce green hydrogen. It’s also used in fuel cell vehicles. Demand is significant but more likely in a ten- to 15-year horizon. But as more people are aware of platinum’s strategic role in decarbonisation, they’re having a look at platinum and what they’re seeing is actually quite interesting. Certainly, the thrust of decarbonisation is driving more investment demand.
Mining Weekly: What is the consequence of heightened global risk on investment demand for platinum and investment in platinum?
Raymond: What we saw in quarter three was significantly lower investment demand than the records that we saw in 2019 and 2020 but it was a bit of a mixed bag. We had ETFs that reduced, and that was mainly because funds in South Africa were switching from platinum ETFs into platinum group metals mining equities, where the dividend yield is quite high. We also saw stock flows out of the Nymex futures market. So those were down. But bar and coin has been really, really strong. We had record bar and coin demand of over half-a-million ounces last year, very strong at the moment, up 25% in quarter three, and we’re forecasting strong growth in bar and coin next year. Retail investors are concerned about global risk. They are looking for an alternate to equities, and certainly commodities, precious metals and platinum are on that list, so we think that strong demand is likely to continue.
Mining Weekly: What are the factors that could potentially lower the 637 000 oz platinum surplus predicted for 2022?
Raymond: When you say it like that it sounds like quite a massive number and I think there will be an even bigger surplus this year than for next year. What’s important is the volatility or the certainty around the estimate of that surplus for next year is quite high. I think there are a number things that could change that. Obviously, the increased rates of substitution in China and in North America certainly might be part of that and the loadings. If you look at the loadings of heavy-duty vehicles in China they are looking around 3 g per heavy-duty vehicle. We know in North America and Europe that’s north of 20 g per heavy-duty vehicle. Interestingly, if you just added that loading on to the China vehicles, it almost explains that difference between imports and demand. I think that should unravel in the next while. Even investors rotating out of ETFs into equities in South Africa is not a loss of faith in the sector. It's really just that the dividend yields are very high because of those high palladium and rhodium prices. I think there are a lot of things that could play out next year that could materially change that surplus.
Mining Weekly: Third-quarter industrial demand was 20% up owing to China increasing the capacity of its glass sector. Is this a once-off pull or will the increased demand be ongoing?
Raymond: This is a theme we’ve been talking about for several quarters. As is typical when you get a massive increase in demand, capacity changes. As with most industrial demand, when you introduce new capacity, you use quite a lot of platinum. In China the demand for glass fibre, particularly LCD glass, but mainly glass fibre, they’re using glass fibre in building insulation as a climate-change imperative. So what we saw was there was a lot of expansion planned for 2020 and some of that didn’t quite happen but moved into 2021, and those expansions went ahead. We saw in the first quarter of this year, glass demand was really massive, so that’s boosted industrial demand in 2021 and obviously once you’ve had this capacity expansion, in the next few years you don't have it. We see in our forecast for 2022 a drop in glass demand, and again not because it’s not being used in the segment, but that expansion doesn’t occur. Then similarly in petroleum, during Covid there was less gasoline used and as that’s come back, those turnarounds that were done are being completed, so petroleum demand is strengthening. So I think typically of industrial demand, it is quite lumpy, but certainly strong growth over a three-, four-, five-year period.
Mining Weekly: What are the biggest projected 2022 demand pulls?
Raymond: Automotive is certainly the biggest. We’ve had the semiconductor crisis reducing the number of vehicles being produced. I think at the beginning of the year they were forecasting 87-million light vehicles this year and that’s dropped down to 77-million, and equally the forecast for next year is down, so significantly fewer vehicles being produced, yet platinum automotive demand is extremely strong and up in most regions. The reason for that is higher loadings per vehicle because of tighter emissions legislation, particularly in China, and certainly substitution of platinum for palladium. So even though we are forecasting significantly fewer vehicles being produced next year, platinum automotive demand goes up by about 500 000 oz, and that’s really material. The other thing that’s happening is that, with the semiconductor shortage, new vehicles just aren't available and consumer demand is still there. In the US, we’ve seen the price of used vehicles go up by nearly 40% and between 5% and 15% elsewhere in the world. So. there’s strong demand for second-hand vehicles and that reduces recycling supply, and that pent-up demand does a couple of things. Automaker stocks of new vehicles have dropped from about 40 days down to 20 days. If things improve and there is any easing in that semiconductor supply chain, and the original equipment manufacturers are working very hard to resolve it, more vehicles will be produced and consumer demand will probably see the automakers increasing their stocks again from 20 days to 40 days, so you could get quite a boost of production. We’re seeing 500 000 oz growth. Any resolution of those supply chain issues could see significantly more demand and again there are material numbers here and a few hundred thousand ounces can change that surplus quite a lot.
Mining Weekly: In a nutshell, what are the trends that continue to make platinum a compelling investment going forward?
Raymond: The issue is constrained supply and demand growth. We’ve spoken a lot about demand growth and that could be either reasonable or spectacular. But in terms of supply, the supply from South Africa in 2021-22 has been boosted by that material that was built up in 2020 with the converter plant outages at Anglo American Platinum. There have been about 560 000 oz of platinum that accumulated and that was going to be gradually processed over two years. Anglo has done really well and there's nearly 370 000 oz of that has boosted 2021 supply and another 190 000 oz will boost 2022 supply. But if you strip out that backlog material, you’re actually looking at mined refined production at lower levels than 2019. What that means is that when we get to the end of 2022 without that boost, production levels are below 2019 and demand is growing particularly strongly. So I think a lot of investors are looking at that fact – that by 2023, things are really, really tight and if we get a big of explanation of what the difference is in terms of China imports, it can change that picture significantly. I think that's what is driving the growth in ETF demand, certainly in North America and Europe, and I think that’s a theme going forward.