We had previously expected the global platinum market to flip into a surplus this year as the measures taken to contain the coronavirus weighed on most types of demand for the metal. However, in light of our recently revised real yields forecast, we now expect the boost to platinum investment demand associated with the ongoing decline in real yields to keep the market in a deficit this year.
- We had previously expected the global platinum market to flip into a surplus this year as the measures taken to contain the coronavirus weighed on most types of demand for the metal. However, in light of our recently revised real yields forecast, we now expect the boost to platinum investment demand associated with the ongoing decline in real yields to keep the market in a deficit this year.
- Since its low in mid-March, the price of platinum has recouped most of its virus-induced losses and is now trading at just under 10% below its pre-virus peak. While the partial rebound in global auto sales has helped to lift the price (see here), most of the recovery so far has been due to strong investment demand.
- Investment demand for platinum has been underpinned by the slide in real yields. (See Chart 1.) As the available return on competing assets (such as bonds) has fallen, platinum has become more attractive to investors. Accordingly, net inflows into platinum-backed ETFs have surged since their lows in March and April. (See Chart 2.) What’s more, a higher gold price seems to have encouraged investors to invest in other precious metals, including platinum, which look cheap by comparison. (See Chart 3.)
- We think that the platinum price rally has a little further to run. While we suspect that global platinum demand will be 10% lower y/y in 2020 as a whole, the worst of the hit to demand is already behind us. Admittedly, platinum-based jewellery continues to fall out of vogue in China (by far its largest market), which will drag on consumption. But the prohibitively high cost of gold may take off some of its shine as a substitute and thereby slow the shift away from platinum and towards gold.
- In terms of our price forecast, our thinking on the jewellery segment of demand has not changed. Where it has changed is in relation to investment demand. While real yields have come back a bit in recent days, we expect them to sink even lower. (See here.) This prompted us to raise our forecast for the price of gold, which we now think will reach US$2,100 per ounce by year-end. (See here.) As a result, we think that investment demand for platinum will remain elevated for the rest of this year.
- However, we expect little more than a fragile recovery in autos demand in the coming months, which will place an upper limit on prices. Indeed, car production is the largest source of platinum demand (see Chart 4) and we doubt it will pick up to pre-virus levels before the year is out. True, auto sales have pulled off a partial rebound since April (see Chart 5), which has supported prices so far. But we suspect that most of this recent strength reflects purchases delayed during lockdowns. Accordingly, the recovery looks set to taper off, with improving conditions in the major markets only lifting car sales a little higher. (See Chart 6.)
- On the supply side, we think that production in South Africa (which accounts for over 70% of the world’s primary platinum supply) will fall by around 15% this year after lockdowns led to widespread mine closures earlier this year. (See Chart 7.) By contrast, supply from the other major producers (including Russia, Zimbabwe and North America) should remain broadly unchanged on-the-year. Meanwhile, recycled platinum supply will fall on the back of lower secondary autocatalyst supply, as the virus-induced contraction in auto sales has resulted in fewer used vehicles being sold for scrap. All told, we expect total supply to fall by around 8% y/y, almost entirely driven by lower output in South Africa.
- Despite our forecast that consumption will decline by more than production this year, we think that the market will remain in a small deficit. (See Chart 8.) What’s more, the market balance should become more favourable for prices from now onwards. All in all, we expect the price of platinum to rise a little further, to around US$1,000 per ounce (previously $900) by end-2020.
- Further ahead, though, the outlook for the platinum market is bleak. As the widespread shift away from platinum-intensive diesel cars continues, and jewellery demand in China declines further, the market is likely to flip into a surplus in 2021 and beyond. This means that the strength in the platinum price will ultimately prove short-lived, with the price set to drift lower again from the beginning of next year.
Chart 1: US 10Y TIPS Yield & Platinum Price (2020)
Chart 2: Platinum ETF Flows & Price
Chart 3: Gold/Platinum Price Ratio
Chart 4: Share of Global Platinum Demand (2019)
Chart 5: Auto Sales (% y/y)
Chart 6: US Unemployment Rate & Auto Sales
Chart 7: South Africa Platinum Production (% y/y)
Chart 8: Platinum Market Balance (Th. Ounces)
Sources: Refinitiv, Bloomberg, Capital Economics
Bethany Beckett, Assistant Economist, email@example.com