Platinum prices: The top 10 most important drivers

1) South Africa

As of 2016, South Africa produces approximately 70% of the world’s newly mined platinum. As a result, conditions in South Africa are crucial to the supply of platinum. Given that South Africa’s political environment has become increasingly volatile in recent years, platinum supply is subject to a fairly high degree of political risk. Platinum production from their mines have been hit by labour disputes and foreign currency instability. These risks were felt particularly hard in 2014, when workers for for a number of miners all went on strike hitting 40% of global platinum production. Geological problems have also hit the nations miners with flooding causing the shutdown of mines in the past. Meanwhile the country’s crumbling electricity infrastructure has also caused production to be delayed as intermittent or longer electricity cuts delay platinum production.

The other main producers of mined platinum are Zimbabwe, North America and Russia. Taken together with output from South Africa mined supply accounts for around 75% of total platinum supply.

2) Recycling

Around one quarter of total supply comes from recycling and recovering of platinum from vehicles and jewellery. Higher prices typically incentivise the recycling of platinum catalytic converters from vehicles. But since platinum forms a very small proportion of the value of a vehicle high platinum prices only have a marginal impact on the incentive to recycle. High steel prices encourage dismantlers to recycle vehicles and take platinum and other materials as byproducts.

3) Stockpiles

Very little information is known about how much platinum is held in stock (either for investment purposes or for industrial applications) since not all of the metal is accessible and could be stored in vaults. Current estimates of above stocks by the World Platinum Investment Council (WPIC) put stocks at about 20%-25% of annual demand, however estimates vary widely with many suggesting stocks could be significantly larger. Perhaps even more important however is who holds the platinum and under what circumstances they would be prepared to make them available to the market.

4) Vehicle demand

Roughly 40% of platinum demand is from the automotive sector and so changes in vehicle production have a significant impact on platinum fundamentals. Platinum is typically used in catalytic converters fitted to diesel cars while petrol powered cars generally use palladium. With diesel cars typically using platinum in its catalytic converter trends in Europe (where diesel cars form a much higher percentage of the vehicle mix than other regions) are worth keeping an eye on.

5) Emission standards

Diesel cars have become increasingly unpopular in Europe since the Volkswagen scandal rocked the car industry over the under-reporting of emissions and the driving public has become more aware of the environmental problems that diesel cars can cause. Public uncertainty over the risk and timing of possible diesel bans in some cities has also put a dent in sales of diesel cars in Europe. Its not all bad news – the growth in the use of catalytic converters on heavy duty trucks in the USA and Asia (which tend to use diesel) as controlling emissions becomes more important is contributing to higher demand for platinum.

6) Technological change

Should electric vehicles grow in popularity then demand for both platinum and palladium could fall. However, the continued use of hybrid vehicles may mean the impact is not as severe. Until recently it was thought that fuel cell cars would use a lot of platinum, potentially providing a new source of demand for the metal as existing internal combustion engine cars decline. However, it is now thought that the amount of platinum used could be cut to very low levels. Should the price of platinum decline relative to other substitute materials other uses will be found by manufacturers, but as always it is very difficult to envisage what these could be nor the amount of material that they will use.

7) Jewellery

Demand for platinum jewellery was almost nonexistent 20 years ago. However, in recent times, platinum’s use in jewellery has grown extremely fast. Jewellery demand for platinum accounts for approximately 30% of total platinum demand.

8) Industrial applications

Platinum is also used in applications as diverse as laboratory equipment, dentistry equipment and computer hard disks.

High prices incentivise vehicle manufacturers to look for alternatives or reduce the amount of metal used in their products, whether catalytic converters or other products. This could involve substituting platinum with other metals such as palladium or rhodium.

9) Investment

The launch of a number of two platinum exchange traded funds in 2017 helped support investor demand, opening up the possibility of investing in platinum to a wider group of investors while diverting platinum which may have otherwise been available to industrial customers.

Investors should be cautious though. Unlike gold and to a lesser extent silver, the platinum market is a lot more opaque while swings in investment fund flows can have a disproportionate affect on prices.

Silver has been compared to gold as being ‘gold on steroids’, acknowledging its volatility. Platinum, palladium and the other precious metals are in the same camp of volatile returns, if not more so.

10) US dollar

A weaker dollar can act as a disincentive to producers to increase output. For example, a depreciation of the US dollar against the South African rand will (all other things being equal) reduce profit margins for platinum miners based in the country. All of its revenue will be received in US dollars, which will now buy less rand, but some proportion of the costs will be denominated in rand and will remain constant (at least in the short term). The prospect of a lower profit margin acts as an incentive to decrease the supply of platinum on to the global market.

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