The Future Looks Bright For Platinum

Johnson Matthey released it's annual report on Platinum (.pdf) Monday, causing quite a little ripple in the platinum markets.

Here's the headline version: 2006 was an interesting year for the shiny metal. Prices rose by 27 percent on the year, and closed out 2006 with an average price above the magic-yet-meaningless $1000 threshold for the first time ever. There were periods of extreme volatility, of course, much like those in the gold and silver markets, with prices rising and falling in response to weak dollars and other commodity performances.

We tend to elevate precious metals to some mystical plane above the base reality of supply and demand. But more so than gold or silver, platinum is actually an industrial metal with a price driven primarily by old-fashioned economic growth. Sure, it’s on the hands of blushing brides, but tiny bits of it are also in thousands of different products: cars, computers, chemicals, oil refineries and more.

For 2006, demand was up 1.2 percent, mostly from catalytic converters and industrial applications. We continued to see some substitution of the much cheaper palladium in these applications, thanks to palladium’s significantly lower prices. But the decreased amount of platinum used per application has been offset by dramatic growth in the sheer number platinum-consuming products around the world. That’s particularly true of diesel engines, which have been growing like crazy, and where platinum plays a key role in sustaining decent environmental performance.

Of course, platinum does still appear around the fingers of newlyweds. Here, the story is different: demand for platinum jewelry was down 18 percent last year to 1.61 million ounces. Additionally, because of high prices, there was an increase in “recycling,” with customers bringing their old pieces to exchange for newer pieces.

The flip side of the equation is supply, which jumped last year due to an expansion of South African production. Net-net, the platinum industry posted its first metals surplus since 1998: just 10,000 ounces, but a surplus none-the-less.

So … what happens next?

The Future's So Bright...

Unsurprisingly, JM is calling for continued growth. Demand for light duty diesel vehicles continues to surge in both Europe and Asia, and nobody is talking about making trucks that pollute more. Therefore, JM sees more demand pressure from the industrial side.

As for jewelry, JM is less sure, calling an increase in metal purchases “feasible” given the more stable price. That’s a nice way of saying, “Who the heck knows. Read Bride magazine and you'll figure it out.”

The big X-factor is the new exchange-traded funds (ETFs.) ETF Securities has already launched a platinum ETF in London, and Zuercher Kantonalbank is planning the same for Swtizerland. There is even talk of having a platinum ETF in the U.S., although nothing is in registration yet.

The new platinum ETFs operate like the familiar gold ETFs: they hold bullion in a vault. With the platinum market pitched closely on the edge of supply and demand, the platinum ETFs could quickly wipe out the small surplus metal available today if investors take a likely to them. And that, of course, would send prices higher; some folks expect to see the metal hit $1,400 this year..

Still, like jewelry, the ETFs will likely exist at the margins for now. With platinum’s key role in industry, the story really boils down to this: as long as healthy economic growth continues, platinum will do well. Jewelry and ETF will only gild the lilly.