Platinum Weekly: Risk-Reward Skewed To The Upside Despite The Depression In The Automotive Sector
Summary
- PLTM has stabilized above $7.50 per share over the past two weeks, after a sharp rebound in the second half of March elicited by substantial supply disruptions in South Africa.
- Although South Africa has relaxed its lockdown, risks of further supply disruptions in the country cannot be ruled out considering that the COVID-19 remains a big threat to miners.
- While this could push PLTM still higher in the second quarter, we caution against the sustainability of the rebound, principally because the COVID-19 crisis has hindered severely the automotive market.
- In the shorter term, we see a max upside of $9 per share for PLTM in Q2.
Thesis
Welcome to Orchid's Platinum Weekly report, in which we discuss platinum prices through the lenses of the GraniteShares Platinum Trust (NYSEARCA:PLTM).
PLTM has stabilized above $7.50 per share over the past two weeks, after a sharp rebound in the second half of March elicited by substantial supply disruptions in South Africa, which produces most of the global platinum production.
Source: Bloomberg, Orchid Research
Although South Africa has relaxed its lockdown, risks of further supply disruptions in the country cannot be ruled out considering that the COVID-19 remains a big threat to miners.
While this could push PLTM still higher in the second quarter, we caution against the sustainability of the rebound, principally because the COVID-19 crisis has hindered severely the automotive market and thus the autocatalyst demand outlook for platinum. As the platinum market is very likely to post a noticeable surplus this year, we do not believe that the rebound will turn out to be sustainable.
For Q2, we forecast a trading range of $6.00-$9.00 per share for PLTM.
Source: Trading View, Orchid Research
About PLTM
PLTM, which was created in January 2018, is directly impacted by the fluctuations of platinum spot prices because the Funds physically holds platinum bars in a London vault and custodied by ICBC Standard Bank.
The investment objective of the GraniteShares Platinum Trust is to replicate the performance of the price of platinum, less trust expenses (0.50%), according to the official Graniteshares' website.
The physically-backed methodology prevents investors from getting hurt by the contango structure of the platinum market, contrary to ETFs using futures contracts.
Also, the structure of a grantor trust protects investors since trustees cannot lend the platinum bars.
PLTM is the lowest-cost ETF on the market, with an expense ratio of 0.50%. PLTM competes with the Aberdeen Standard Physical Platinum Shares ETF (PPLT), which was created in October 2010, which is however more expensive considering that its expense ratio is at 0.60%.
Speculative positioning
Source: CFTC, Orchid Research
The speculative community notably raised by the equivalent of 102 koz (4% of open interest, 1% of annual supply) its net long position in NYMEX platinum in the week to April 28, according to the CFTC.
This was the first week of net buying over the past 8 weeks, which could point to a shift in speculative sentiment.
As we noted last week, the risk of supply disruptions in South Africa could prompt the speculative community to jump back in on the long side of the market.
Given the clean positioning - the net spec length is at just 34% of open interest, we think that there is some decent room for additional spec buying in the near term.
Implications for PLTM: A resumption of spec buying in NYMEX platinum would lift the NYMEX platinum price still higher in the near term, which, in turn, would boost PLTM.
Investment positioning
Source: Orchid Research
ETF investors liquidated their platinum holdings by 13 koz in the week to May 1, marking the 6th straight week of net selling.
In contrast with the speculative community, ETF investors have not resumed their buying activity in platinum, highlighting a cautious sentiment.
We believe that some ETF investors are getting frustrated by platinum, especially after betting big on it last year. As a reminder, investment demand for the metal jumped by 1 moz last year, a record increase.
The COVID-19 crisis has intensified the fundamental weakness of platinum demand due to severe disruptions in the automobile sector. According to LMC Automotive, global auto sales tumbled by 24% YoY in the first quarter, an unprecedented contraction.
In Europe, which accounts for the largest of autocatalyst demand for platinum, passenger car registrations crashed by 25.6% YoY in the first quarter, including a slump of 55.1% YoY in March, according to the ACEA.
Source: ACEA
To wit:
From January to March 2020, demand for new cars in the European Union1 declined by 25.6%, with the impact of the corona crisis on March figures weighing heavily on the total. Each of the major EU markets posted significant losses so far in 2020: Italy -35.5%, France -34.1%, Spain -31% and Germany -20.3%.
LMC Automotive forecasts a contraction of 14% in Western European car sales in 2020.
Implications for PLTM: Despite the depression in the automotive sector, we think that investors could resume their ETF buying activity for platinum considering that 1)the platinum price is historically cheap, 2)automobile demand will recover in the second half of the year, and 3)supply disruptions in South Africa remain a big upside risk to prices. This should, therefore, exert upward pressure on PLTM.
Closing thoughts
While we think that there is more upside for PLTM in the near term due to the heightened uncertainty surrounding the outlook for South African platinum production, we believe that the rebound is unlikely to be sustainable.
The unsustainability of the recent rebound in PLTM is caused by the depression in the automotive sector and the resulting significantly negative impact on autocatalyst demand for platinum.
As a result, we think that the platinum market is likely to post a noticeable surplus this year, which should exert deflationary pressure on platinum prices.
In the shorter term, however, we expect PLTM to reach a possible high of $9.00 per share in the second quarter.
Bonus chart
This is how the platinum price is cheap compared to palladium:
Source: Bloomberg, Orchid Research
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