Move over gold! Platinum has become the hottest commodity investment among metals. This past year exhibited an unprecedented rise in world platinum prices. Platinum prices hit a record of $2,273/ounce last March, which represented a 70% spike over the price in mid-August 2007, of approximately $1,265/ounce as recently reported in the International Herald Tribune. On June 9, 2008, the NYMEX Platinum futures contracts closed at $2,069 an ounce.
Industrial demand is not alone in causing the dramatic spike in platinum prices seen this year. According to some, European commodity-based exchange-traded funds [ETFs] exacerbated the price shock by bidding up the price of platinum for speculation. These ETFs hold platinum in bank vaults to back their securities. The ETFs do not consume platinum, so eventually their platinum holdings could be released on the open market. But as long as platinum prices keep rising, and investment flows keep coming, the ETFs will likely continue to expand and acquire more platinum rather than release their hordes.
The
European-based platinum ETFs, including those managed by ETF Securities
and Switzerland's ZCB, together own about 365,000 ounces of platinum as
compared to about 40,000 ounces at the end of 2007. All of that
platinum stored by the ETFs has been taken away from industrial users
and no doubt contributed to the rise in platinum prices.
The question is, how much?
Demand Choked?
When ETF Securities and ZCB's funds were created in April 2007, two of the largest platinum suppliers by volume, Anglo Platinum and Impala Platinum, were quoted by Reuters as saying they refused to supply any platinum to the ETFs. The suppliers were justifiably concerned that the higher platinum prices caused by the ETF hordes would eventually choke off demand for platinum jewelry and pressure the automotive industry to substitute platinum's sister metal, palladium, in catalytic converters. Once the automotive industry changed its manufacturing processes to accommodate palladium, they would not be returning to the platinum market. The scenario predicted by the platinum suppliers appears to be playing out.
The U.S. does not have platinum ETFs, but Swiss
global bank UBS introduced two exchange-traded notes (ETNs) - E-TRACS
UBS Long Platinum ETN (NYSE Arca: PTM) and E-TRACS UBS Short Platinum
ETN (NYSE Arca: PTD) - in May 2008. These ETNs track the prices of
platinum futures contracts but do not require platinum to be held as
security. ETNs are senior unsecured debt obligations issued by
financial institutions and carry credit risk. They essentially
represent a promise by the issuer to deliver the performance of an
index, minus fees.
The new notes allow investors to take a
bullish or bearish view on platinum. The E-TRACS UBS Long Platinum ETN
simply follows platinum futures prices, while the E-TRACS UBS Short
Platinum ETN works in the opposite direction for those interested in
shorting the UBS Bloomberg CMCI Platinum Excess Return.
At the hefty price of $2,069/ounce, industrial users have financial incentives to substitute palladium and other metals for the more expensive platinum in manufacturing processes. Historically, the automotive industry represents the single largest source of demand for platinum, which is needed in manufacturing catalytic converters, especially in diesel cars and trucks. Catalytic converters are cylinders formed into a fine honeycomb, coated with a solution of chemicals and platinum-group metals, mounted inside a stainless steel canister and installed in the exhaust line of a vehicle to remove pollution particles.
The second-largest demand for platinum comes from the jewelry industry, followed by various other industries including chemical, glass and electronics manufacturing. According to the annual report of London-based platinum refiner and specialist firm Johnson Matthey released on May 20, 2008, global demand for platinum, one of the world's rarest metals, climbed by 8.6% to 7.03 million ounces in 2007. In other words, the world added approximately 600,000 ounces in new demand last year - more than half of it driven by the ETFs.
The world supply of platinum simply cannot match this demand. Supplies of platinum totaled 6.55 million ounces in 2007, according to the Johnson Matthey annual report, which represented an excess demand or shortfall in supply of 480,000 ounces. Most platinum is produced in just two countries: South Africa (80%) and Russia (15%), unlike gold and silver, which are mined in numerous countries around the world.
Ironically, the 2007 excess demand for platinum followed the first year with excess supply (2006) in eight years. According to the Johnson Matthey annual report, the excess supply of platinum in 2006 totaled 355,000 ounces. The company estimated jewelry demand for new platinum metal last year, net of scrap recycling, fell by 55,000 to 1.59 million ounces. However, global purchases of platinum by the automotive sector climbed by 8.2% to 4.23 million ounces last year.
Cheaper Palladium As Alternative
Platinum
demand by the automotive sector would have been much higher than 4.23
million ounces, except that the industry aggressively responded to the
increasing input costs for platinum by remanufacturing catalytic
converters for gasoline engines to use much cheaper palladium instead
of platinum. Yet the automotive industry has not been able to
substitute away from platinum as easily for its diesel engines
catalytic converters. But with prices on the order of $2,069/ounce, the
industry has a powerful incentive to invest in new technologies for
emission control that will reduce the industry's need for the white
metal.
With production of this scarce metal so heavily
concentrated in one country, any disruptions in South African supplies
of platinum would have an immediate effect on world prices. When South
Africa experienced power shortages in March 2008 and had to curtail
power to the platinum mines, the price of the white metal reached its
all-time peak. Unfortunately, South Africa has an aging power
infrastructure, so power shortages and temporary disruptions will
likely persist for at least the next five years, if not longer. Even
rumors of power disruptions in South Africa could trigger periodic
spikes in platinum prices for years to come.
The crux of the issue for platinum holders is how the see-saw of prices, demand and supply will tilt in the coming years. According to many industry analysts, the current high prices and worries about "supply shocks" from disruptions in South Africa are rapidly pushing industrial users of platinum to look for other approaches. If prices stay high - or if a combination of power shortages, ETF demand and other factors push prices higher still - that could ultimately lay the groundwork for a significant long-term drop in prices and total demand.
