Platinum is a silvery-white pure metal that exhibits a remarkable resistance to corrosion, even at high temperatures. It is one of the rarest elements in the earth's crust and has an average abundance of approximately 0.005 mg/kg. Global mining supplies in 2010 were around 6.06 million ounces. Platinum, along with the rest of the platinum metals, is obtained commercially as a by-product from nickel and copper mining and processing. The largest known reserves are in the Bushveld complex in South Africa, making up more than 75% of global supplies. The other key countries with proven reserves are Russia, Canada and Zimbabwe.
Four industries drive the demand for platinum (see Graph 1):
- Automobile industry for auto catalysts
- Manufacturing of electrical items, glass and chemicals
- The jewelry industry, with 75% of global demand coming from China
- As an investment asset
The demand, and for that the price of platinum, is strongly linked to the economy and mainly driven by the automobile and jewelry industry. Demand and supply have been in a delicate balance. The mining output over the last years has not met demand. Around 20 to 25% of demand is met by recycling of platinum previously used. Graph 2 (Data source: “Platinum 2011”, Johnson Matthey PLC) gives an overview of demand and supply (in '000 oz).
Looking ahead I expect a few headwinds. The supply from recycling will increase as more end-of-life auto vehicles are returned. The developed economies are looking at years of slow growth. And substitution of platinum with palladium in auto catalysts will continue.
The investment thesis for increased demand and higher prices is driven by a few factors.
In the last five years prices of palladium have doubled (to around $600 per oz), while platinum prices have increased by 50% (to around $1500 per oz). Although the gap is still big, palladium prices are increasing and 2010 is the first year in which mining supplies and recycling didn’t meet demand. There are limits to substitution. On a side note, I do think that palladium makes an interesting investment if the price drops further.
The second factor is the demand for fuel cells. In 2010 demand reached for the first time 20,000 oz. This will likely grow significantly in the future as fuel cells take off.
The third factor is additional easing in Europe and the U.S. Developed economies remain weak and additional monetary support is likely. This will drive commodity prices, as it has done in the past. The last factor is China. China is becoming the biggest market for platinum. Standards of living are increasing, more and more people in Tier 2 and 3 cities will buy jewelry. Currently, jewelry demand in China is around 1.65 million oz. I do expect this to increase significantly in the coming years. The other component is automotive sales. The combination of first time automobile buyers, fuel cell technology and stricter environmental regulation will be a powerful driver for future demand.
Why do I think now is a good time to start a position? The price relatively to the price of gold is at the lowest ratio in five years (equal to the 2008/2009 crisis ratio). The median ratio in this period is 1.43, with the maximum being above 2. Currently the platinum/gold price ratio stands at 0.95. This is a good indication that platinum prices might be undervalued (graph 3).
With the long-term demand/supply thesis outlined and a relative low price for platinum, this looks like a good time to open a position. A simple way to invest is through ETFs, like the ETFS Physical Platinum Shares (PPLT).