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[Heraeus Precious Metals Weekly] : Platinum investors are finally paying attention to South Africa's

2023-05-14

At the end of April, South African funds bought heavily into platinum ETFs. South Africa (+ 333,000 oz) has been the most prominent regional flow into platinum funds so far this year, compared with the US (-107,000 oz), the UK (-18,000 oz) and Switzerland (-17,000 oz). So far this year, net flows have been positive every month as South African investors become more acutely aware of the power supply issues facing platinum group metal producers. Total global holdings stood at 3.3 million ounces, up from 3 million ounces at the start of the year, although this was down 1 million ounces from the peak in July 2021.

These investors have accepted the recent price rise and are hoping for more. Since late February, before the latest correction, platinum prices had risen more than 20 percent. South Africa's supply problems (about 75 per cent of extraction supplies) are well documented. The regularity and severity of load shedding in 2022 was unparalleled, and the situation is unlikely to improve significantly in 2023. Last year, downloading led to an increase in above-ground stocks of unrefined platinum group metals, and with the onset of the southern Hemisphere winter, platinum production is estimated to be lost by about 250,000 ounces this year. First-quarter results from South Africa's leading platinum-group metals miners all show that load reduction has affected refining production to some extent.

Market fundamentals look solid. Global demand for platinum in automotive catalysts is expected to rise 14% this year to a six-year high of 3.2 million ounces. A revival in light vehicle production and the widespread use of three-way catalytic converters for petrol cars in Europe and China, where platinum has replaced some palladium, has pushed the platinum market into the red.

Other indicators suggest that may now be the case. In the last two weeks of March, non-commercial speculative net long positions more than doubled to 1.5 million ounces. Platinum's rally has stalled and is positioned around this level. Platinum has also been affected by the dollar-rand exchange rate, which has a good negative correlation with the metal (a weaker rand and lower platinum prices). Since 2022, there has been a mismatch between the two. Restoring the historic relationship may require an adjustment in platinum prices, given that the weakness of the South African economy makes a rise in the rand look unlikely. Finally, and perhaps the most controversial argument for lower platinum prices is that the metal's seasonality suggests the first six months of the year will see the highest prices. On average, relative underperformance.

Despite the short-term correction underway, overall price risk appetite is still rising. With demand for cars strong, the risk of poor supply performance has underpinned a tight market all year. There is still room for prices to rise, especially as South Africa's power supply situation deteriorates.

Precious metals information

gold

The Fed may be raising rates for the last time, but gold can't hold its gains. While COMEX gold futures hit an all-time high of $2,085 an ounce after the Fed's latest announcement, spot prices did not succeed in surpassing the all-time record of $2,075 an ounce from August 2020 to $2,063. The Fed did not include the phrase that additional rate increases might be appropriate, although Chairman Powell's comments suggest the Fed does not expect a rate cut this year. However, while the market assumes no change in rates in July, the likelihood of a cut from September is increasing. Lower bond yields will support gold. Technically, gold is showing a divergence from the RSI, suggesting that the correction could continue in the near term.

The European Central Bank also met last week and raised rates by 25 basis points. Gold rose more on the ECB news than it did after the Fed announcement, but it didn't set a new record for the euro. Intraday spot prices hit a record high of 1,902 euros per ounce on March 8, 2022, following Russia's invasion of Ukraine, and were higher earlier this year.

silver

The strong start of PV installations in China bodes well for silver demand. The National Energy Administration reported that China added 33.66GW of solar power capacity in 1Q23. This is strong demand in winter, likely helped by the lifting of COVID-19 quarantine restrictions late last year. The sharp fall in silicon prices may also have played a role. Earlier this year, the China Photovoltaic Industry Association predicted that installed capacity could accelerate to 95-120GW by 2023 from 87.4GW last year. If the current pace continues, China may break through this upper limit. Globally, PV installations could exceed 300GW, which would lift silver demand from 140 million ounces to more than 160 million ounces (source: Silver Institute), or about 14% of total silver demand.

Investor interest in silver remains strong. The Perth Mint in April posted its highest monthly sales of silver bars so far this year at 1,947,743 ounces. Year-to-date sales totaled 6.5 million ounces, down from 7.8 million ounces in the first four months of 2022. However, this year's sales are the second highest after 2022, when precious metals were bought as a safe haven following Russia's invasion of Ukraine. Global silver ETF holdings rose 1.5 million ounces in April, bringing year-to-date gains to 1.8 million ounces.

Silver prices also recovered last week, but failed to stay above $26 an ounce. The ratio of gold to silver remains around 79, but silver has been outperforming gold since March as the ratio has fallen from 91.

platinum

South Africa may struggle to produce 4.1 million ounces of platinum this year. Production is expected to be 4.1 million ounces, including some disruptions due to difficulties caused by power rationing. That includes getting rid of some of the inventory that has built up. However, there is a risk that more severe power outages in the southern Hemisphere winter will reduce productivity and refining output may fall as stocks cannot be processed.

Platinum production in South Africa was affected by unreliable power supply in 1Q23. South Africa's national power company has struggled to provide enough electricity to meet demand as the breakdown has reduced available power plants. The Platinum Group metals mining company is currently reporting the impact on its 1Q23 production. The lack of reliable power exacerbated other operational problems and caused some of the processed materials to build up. Impala Platinum reported that about 16,000 ounces of 6E (platinum, palladium, rhodium, iridium, ruthenium, gold) could not be refined in the first quarter, increasing excess inventories to 190,000 ounces of 6E (about 100,000 ounces of platinum). Total platinum group gold production decreased 10% to 662,000 ounces of 6E (299,000 ounces of platinum). Anglo American Platinum reported total 6E production fell 6% to 901,000 oz in 1Q23, while platinum production fell 6% to 417,000 oz. Anglo also noted an increase of 26,500 oz of 6E in construction inventories due to the impact of power outages, with an estimated surplus of nearly 300,000 oz of 6E, of which about 125,000 oz was platinum. Anglo, however, maintained its production guidance of 3.6-4 million ounces of refined platinum group metals, with 1.65 to 1.85 million ounces of platinum, although this would require sufficient power supply to process some of the stocks.

California, after banning internal combustion cars, now plans to ban diesel trucks, jeopardising long-term platinum demand. California's governor has signed an executive order banning the sale of new passenger cars with internal combustion engines from 2035. The California Air Resources Board has now voted to ban the sale of certain categories of new medium diesel trucks by 2036, some large trucks by 2039 and the rest by 2042. Some government and private truck fleets are required to begin transitioning to zero emissions next year. The Environmental Protection Agency would need to approve the ban, just as it did with cars. Several other states typically follow California's lead, so this could eventually reduce platinum demand for commercial vehicles in the United States by 20 percent, or about 40,000 ounces. That's not a huge amount of platinum, but it indicates the direction of travel in the United States and Europe, as transportation aims to do a lot in reducing carbon emissions. There could be offsets if diesel trucks are replaced with fuel cell vehicles rather than pure electric vehicles. Investment in charging infrastructure and hydrogen fuel stations is also part of the plan. Fuel cells are currently considered more suitable for use in large trucks than batteries, because the weight of batteries reduces the payload.

palladium

Primary palladium production is expected to fall 3 per cent this year to 6.3m ounces. Much of the decline was due to lower production at Nornickel, where scheduled smelter maintenance led to annual palladium production guidance of 2.4 to 2.7 million ounces, compared with 2.8 million ounces last year. Offsetting this to some extent, South African palladium production will be boosted by inventories being processed. However, as already mentioned with platinum, power supply problems make it look increasingly problematic.

Russian palladium production got off to a good start in 1Q23. Nornickel reported first-quarter palladium production rose 2 percent to 721,000 ounces and platinum production rose 11 percent to 180,000 ounces as some inventory materials were processed.

Us light vehicle sales are improving as the impact of the chip shortage abates, as is vehicle availability as dealer inventories are rebuilt. Sales rose to a seasonally adjusted annualized rate of 15.9 million vehicles in April from 15.3 million in March. In the first four months, 4.9 million light vehicles were sold, up from 4.5 million in the same period last year, although January 2022 was the low point for sales as the chip shortage hit hardest. More than 80 percent of new light vehicle sales are financed, but higher loan and lease rates and record average prices for new cars and light trucks don't seem to be deterring consumers.

Palladium demand is likely to be little changed this year. Gains in market share for pure electric vehicles and wider use of catalysts for petrol cars that replace some palladium with platinum could offset any gains from the expected increase in light vehicle production. The palladium market is likely to go into the red this year because of supply constraints. Even so, prices are trending down after hitting record highs last year as the economic outlook remains poor. The economy has yet to fully adjust to one of the fastest rate rise cycles, and a recession in the US and Europe remains a possibility later this year.

Rhodium, ruthenium, iridium

Berlin is expanding a fleet of hydrogen-powered cars. The H2 Moves Berlin project is increasing the number of Toyota Mirai cars from 50 to 200. The two-year project aims to demonstrate the potential of hydrogen-powered vehicles. Germany also has one of the most developed networks of refueling stations in Europe, which makes long-distance use of fuel cell vehicles feasible. Public acceptance of fuel cell vehicles as a zero-emission alternative to pure electric vehicles will support the demand for ruthenium, but further investment in infrastructure will also be necessary.

Platinum group small metal production in South Africa was hit in 1Q23. Intermittent power supply has affected processing plants and cut refining output, leading to an increase in inventories of works under construction. This includes small platinum group metals, with about 30,000 ounces of rhodium and some iridium and ruthenium in the stockpile. Much of the stock can be disposed of this year, but that depends on whether the power supply deteriorates.

Ruthenium and iridium were flat last week, while rhodium fell back to $8,800 an ounce. (Credit: Herry Precious Metals Review)