Platinum in oversupply: Shearson

The platinum market is in fundamental oversupply and is set to stay that way, Shearson Lehman Brothers reports in its Annual Review of the World Platinum Industry 1987.

Although demand for industrial, jewelry and investment purposes has grown during the past five years at an annual rate of 5.6%, and is set to grow by 12.7% in total between 1986 and 1988, Shearson says the historic rate of growth in supply has been marginally greater at 5.7%.

Supply in 1987, Shearson says, is likely to be about 10% higher than 1986 levels, and it would appear the market is in a fundamental surplus of approaching 10%.

Platinum, which has had a standout trading year, was selling at below $500(US) per oz at the start of 1987, a price range it didn’t return to until November. Its high for the year was $644, at the first of August. The precious metal was recently trading in the $500 range. An average price in the mid-$550 range is expected this year, compared with $465 in 1986.

For 1988, Shearson is forecasting an average price of $510 with the market trading broadly between $480 and $550. Price pressure to the extremes, the company cautions, is not to be discounted.

Consumer stocks rebuilt

This year has seen a rebuilding of consumer stocks and of increased delivery onto the Terminal Market in Tokyo; similarly, mine producers are thought to be selling less than their full production so that the over-all excess available to the investment community would be substantially less than the 10 tonnes suggested by the fundamental supply-demand balance.

Despite voluntary stockbuilding, however, the market remains in a surplus of a size and nature that outweighs the strategic nature of its supply sources (South Africa mines 82% of the world’s platinum and the Soviet Union, 9%) and which contributed, along with recessionary fears, to the 24% fall in free market values between Oct 19 and Nov 5.

The market rallied during the summer on reports of surging Japanese imports and broad agreement on European Economic Community (eec legislation to tighten emission control regulations (which, according to current technology, would require the use of platinum group metal catalytic converters in vehicle exhaust systems).

At these levels, Shearson says, the market was overvalued given that at that stage, at least, much of the rise in Japanese imports was destined for exchange warehouses because of arbitrage operation and that the eec legislation, yet to go through the legislative process, would permit, rather than require, nations to tighten their emission control regulations and, further, would be phased in over a 6-year period. Recessionary fears

Recessionary fears deriving from the equity markets’ recent performance helped bring about platinum’s recent fall but they were underlined by earlier over-enthusiasm. With 34% of consumption accounted for by emission control catalysts, fears of a downturn in consumer spending, following an independent series of announcements of future mine projects, generated some disenchantment with the market’s prospects.

Shearson feels the fall has been overdone and the price-elastic response of investment and jewelry demand will help to take up the slack, particularly as the vast majority of jewelry requirements come from Japan where yen- denominated platinum prices fell by almost 30%.

Shearson foresees increased demand in 1988 in most sectors, most notably in the autocatalyst sector as the geographical spread of usage widens. This year’s growth in mine supply will slow substantially although the growth will be offset by increasing recovery of scrap (again, with the emphasis on the autocatalyst sector). The geographical pattern of demand is likely to shift in favor of western Europe and Japan while North American offtake will grow at a slower rate.

With longer term possibilities of a surge in mine supply of up to a maximum of 38 tonnes by 1993, Shearson suggests the market already in surplus is bound to be wary of strong possibilities of a price war among the major producers as the turn of the decade approaches.