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TABLE OF CONTENTS Jul 21 - 27, 2008 Volume 94 Number 22 - 0 comments

Will auto industry woes derail lead, platinum?

LEAD VULNERABLE, BUT SUPPLY ISSUES TO KEEP PLATINUM ROBUST

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By: Ron Mandel
2008-07-21

The recent sales figures coming out of the automotive industry in Detroit have been awful, leading to layoffs at some of the Big Three auto makers and at auto parts suppliers. Since cars are among the largest users of lead, in batteries, and platinum, in catalytic converters, it would seem that the sharp drop-off in auto sales could spell doom for the two metals. But analysts say that there are many other factors at play in both markets, with supply surpluses of lead making it more vulnerable to low prices and power issues in South Africa likely to keep platinum prices aloft.

Although he doesn't study the auto sector specifically, Edward Meir, senior commodity analyst at MF Global in New York City, says poor auto sales aren't helping the lead market, which is suffering from a general slowing of demand.

"We are expecting a surplus this year and next," Meir says. "Warehouse stocks have been rising quite dramatically on the London Metal Exchange. . . from 50,000 tonnes to 100,000 tonnes over one year."

Pointing to a five-fold increase in warehouse stocks over two years, Meir adds: "The market is not as tight as it used to be."

Further, Meir says that lead produced by Ivernia (IVW-T, IVWFF-O) at its Magellan mine in Western Australia, will hit the market at some point, further raising supply. The company is currently awaiting a permit for shipment through the port of Freemantle after concerns over leaking containers led to the suspension of operations last year. Another negative for lead demand is the switch to thin, flat-screen computer monitors and TVs, which do not use lead, from the older cathode ray tube (CRT) monitors and TVs. On the other hand, demand for lead for ammunition has risen. Meir adds that the lead market shows some seasonality, because car batteries are usually replaced in summer or winter.

Meir concludes that, for the first time in five years, the lead market is showing a surplus, albeit a thin one, of about 60,000 tonnes out of a total supply of 5.2 million tonnes, and the surplus is projected to grow to 140,000 tonnes in 2009.

Ify Isiekwe, commodity analyst at CPM Group in New York City, says that 50-70% of lead is used in car batteries, so the sales declines in the automotive industry are bound to decrease demand.

"It's definitely going to have a significant impact on the (lead) market," he says, describing his stance on the metal as "cautiously bearish."

In its commodities quarterly in June, Deutche Bank forecast lead prices at US$1.02 per lb. this year, US78¢ per lb. next year, US65¢ in 2010, US55¢ in 2011, US52¢ in 2012 and US50¢ over the long term. In July, Citigroup forecast lead prices of US$1.04 per lb. this year, US$1 in 2009, US90¢ in 2010, and a long-term price of US30¢.

Turning to platinum, Tom Pawlicki, energy and precious metals analyst at MF Global in Chicago, agrees that weak auto sales are a negative for platinum, but says there are also some bullish fundamentals for the metal.

"There is some growth in Chinese (platinum) consumption, because the Chinese are adopting the European standards for auto emissions... so this offsets some of the losses in U. S. demand for automobiles," Pawlicki says. "At the same time, there have been power outages in South Africa, which ran up the price in late January. Some of the power has been restored, but they are still operating with only 95% of power capacity. There are going to be some supply shortages from South Africa."

As for possible substitution of platinum with cheaper alternatives such as palladium, Pawlicki says this is a factor mostly in gasoline engines. There have been problems introducing palladium into diesel catalysts, so the growing popularity of diesel in Europe is making up for any decrease in demand.

Jon Nadler, senior analyst at Kitco in Montreal, says the platinum market is driven by a myriad of factors and has been on a growth path since 2001, attracting hedge funds and "hot money," as well as exchangetraded funds.

And problems with electricity supply at South African mines will continue to affect supply, he says. Total supply in 2007 was 7.4 million oz., down 4.75% from 2006. Supply was estimated to decline a further 1.4% in 2008 to 7.3 million oz., but Nadler suspects that the decline will be steeper because of the South African power problems. The country supplied 5.1 million oz. platinum in 2007, down 6.9%, or 400,000 oz., from 2006.

Turning to platinum supply from Russia, another significant producer, Nadler says: "We have not really seen sizable Russian sales -- maybe they do not have a lot to sell."

Last year, Russia supplied 790,000 oz. platinum, down 20,000 oz. from 2006, despite higher prices. Nadler estimates that supply from Russia will decline again in 2008 to 750,000-760,000 oz. The country could be stockpiling some metal, but it's impossible to know for certain because platinum inventories in Russia are a state secret.

Total demand last year was 7 million oz., and is projected to rise to 7.3 million oz. this year. Demand from the automotive sector was about 4.3 million oz., or 61% of the total.

In 2006, the market showed a surplus of 750,000 oz., last year dropping to about 360,000 oz. Nadler estimates a deficit of around 400,000 oz. platinum this year. He concludes that such a deficit in a market of 7 million oz. means sustained price strength. He forecasts that for this year, the downside for platinum prices is US$1,400-1,600 per oz., while the upside is US$2,200-2,300. It all depends on how fast South Africa can restore full electricity supply to the mines. Some mines are installing generators, which should help raise production. Nadler does not believe that Russia can increase production enough to make up lost production from South Africa.

Citigroup forecasts platinum prices at US$2,018 per oz. in 2008, US$1,800 in 2009, US$1,500 in 2010 and US$1,000 over the long term.



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