Bloomberg reported Friday that Chinese platinum imports rose by 40% in 2010 over 2009 levels.
As a result of this, and many other factors, platinum supplies are very tight and continue to get tighter. Part of the problem is that the metal is 15 times rarer than gold and it is getting increasingly difficult to find new deposits that are commercially exploitable at today's prices.
Primary demand for platinum arises out of its use in catalytic converters of various types, especially in diesel engines. Secondary demand comes from the manufacture of diamond jewelry, glass making, electronics, and chemical production. Virtually every electronic computer and mobile phone, for example, requires platinum in its manufacturing process.
Palladium can be substituted to some extent, in some uses, such as gasoline engine catalytic converters. However, in most uses, palladium is a far inferior substitute. In other cases, there is no possibility of using any substitute, as only real platinum will do the job.
In addition, people are now beginning to discover platinum as a long term “store of value” in a way that they have only seen gold and silver in the past. People are beginning to hoard the metal both privately, in the form of small bars and coins, and publicly, in the form several newly issued ETFs, like PPLT.
The economic explosion in the developing world has increased platinum demand dramatically as we've seen from the statistics just in from China. But this story is not limited to China alone. It includes a huge rise in platinum demand in India, South America, and even in eastern Europe.
In addition, industrial buyers in the developed world are busy buying in preparation for new regulations that will dramatically increase demand for platinum. Western nations are about to apply strict pollution controls to off-road heavy-duty diesel vehicles. In such heavy duty engines, platinum is the only choice for catalytic conversion. The use of platinum in off-road vehicles in the developed world is expected to eventually increase platinum demand by over 450,000 ounces per year.
Mining supply continues to be stuck at about 7 million ounces per year. About 70% of that comes from mines in South Africa. The remaining 30% is split between Russia, North America and the rest of the world. Other than a relatively small but growing percentage of platinum that is hoarded by investors privately, and in ETFs, there is almost no available above-ground supply. Investors, however, are buying, not selling. So, this platinum is unavailable for use in industrial applications no matter what the price rises to.
New mines were going to be opened in Zimbabwe, but even if that had happened, they were expected to increase mining supply by a few hundred thousand ounces per year at most. That is dwarfed by the fast rising levels of demand. Now it is becoming increasingly clear that these mines may not open at all, or their opening will be significantly delayed by continuing issues with the Zimbabwean government.
In spite of very strong fundamentals, platinum is still the wall flower of the precious metals world. In contrast to the record setting prices achieved by gold and silver, it remains far from its 2008 high of about $2,300 per ounce. Yet, its future prospects are as rosy, or even rosier. Gold and silver have risen in large part as a result of increased investor demand. This, in turn, is the result of intentional debasement of the U.S. dollar by the Federal Reserve, and a similar debasement of the U.K. pound and European euro. Platinum is also responsive to currency debasement, as are all precious metals, and will rise as the debasement continues.
In recent months, platinum prices have risen recently from a low of about $1,670 to a current price of above $1,800. The scarcity of platinum supplies has already caused problems with respect to the January NYMEX delivery requirements. Short-sellers need to buy metal in order to deliver on their contracts, but even though their needs represent a relatively marginal increase in demand, supplies are so that as they try to buy, the price is pressured upward, higher and higher.
By January 20, 2011, NYMEX short-sellers managed to deliver on only 222 outstanding contracts, or 1/3rd of the total. They’ve still got 345 contracts left to go and only about 10 days left to do it. For several days now, not one contract has been delivered upon. In normal circumstances it is in the interest of short sellers to deliver quickly, in order to obtain cash. Interest can be earned on cash, but not on platinum. So why is it taking so long? The market is extraordinarily tight.
Platinum is an extremely rare and valuable metal, much rarer than gold. It is experiencing very high and increasing demand. Supplies are already tight and are likely to become tighter. Almost all experts now predict, for example, that platinum demand will outstrip supply beginning in early to mid-2011, leading to shortages. These shortages are expected to increase, incrementally, year after year. However, given the situation over at NYMEX, it appears that such shortages are already happening.
Existing platinum mines are being played out, industrial demand is increasing, investment demand is sharply increasing, and opening new mines is hampered by (1) political considerations and (2) the fact that the earth’s crust is running out of commercially viable platinum deposits at current prices. Periodic electricity shortages in South Africa may also cause short to medium term price spikes in the future, as they have in the past.
As a result of the current prevalence of market manipulation (especially in the precious metals) as well as generally unstable market conditions, it is impossible to say where prices will head in the next few months. Much of the short term outlook is based upon often capricious decisions by a few trading executives at a handful of banks and hedge funds. However, fundamentals always eventually win against manipulations. It is inevitable, therefore, that we will be seeing much higher prices in the long run. It now appears to be the time to invest in platinum.
Disclosure: I am long platinum.