Platinum to rise on supply constraints

The outlook for platinum is bright in 2013, with prices of the precious metal shooting up by over 10 per cent during the year so far on the back of supply constraints.

Violent labour unrest in South Africa, the world’s biggest producer, and an export ban by Zimbabwe has resulted in uncertainty over supplies of the precious metal.

What is more, demand is expected to rise significantly in the medium-term after the notification of new European automobile emission standards that require diesel vehicles to come equipped with platinum-lined exhaust filters to combat pollution.

Auto sector, main consumer

The automobile sector is the largest consumer of platinum globally, accounting for about 40 per cent of total demand. The jewellery sector is the other major source of demand, with a 32 per cent share of global consumption.

Demand from the jewellery industry tends to be price elastic, while demand from industry tends to be inelastic. However, industrial demand is also prone to a slowdown when the economic outlook deteriorates, as was seen in the second half of 2011. Other industries, such as glass, electronics, non-road emission control equipment and industrial manufacturing account for 22 per cent of platinum demand.

Investment demand has not been a driver of prices, as it only accounts for 6 per cent of the platinum market, but this could change going forward.

Investment demand via exchange traded funds (ETFs) continues to climb; there have been bouts of redemptions along the way, but with holdings near record highs, investors are still bullish.

Likely to boost interest

The sharp rise in platinum prices above that of gold this year will play a large role in boosting investor interest in the precious metal. Historically, platinum has been traded at a small premium to gold, but in recent times, gold prices have run-up beyond platinum due to the uncertainty over the global economy.

In troubled times, gold was seen as a store of value, but now that the uncertainty has begun to dissipate, platinum — which primarily has industrial uses — has gained.

The white metal is currently trading at around $1,675 a troy ounce in international markets. The long-term trend is upward, with key support at $1,495/ ounce and key resistance at $1,730/ ounce.

Huge shortfall

According to the US Commodity Futures Trading Commission, platinum demand is pegged at 7.6 million troy ounces in 2013, whereas supply will only amount to around 7.2 million troy ounces, translating into a 4 lakh troy ounce shortfall. The gap was larger in 2012, but this is still the largest deficit since 2002.

Thomson Reuters GFMS, on the other hand, has projected demand at 7.2 million troy ounces and demand at 7.3 million troy ounces, implying a 1 lakh troy ounce supply shortfall during the year.

Citi Group has projected that platinum prices will rise by 1.5 per cent to $1,700 a troy ounce in 2013. On the other hand, Barclays has predicted 2013 prices of the precious metal at $1,690 an ounce.

> arvind.jayaram@thehindu.co.in

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