Has Platinum Lost its Shine?
An Earn2Trade Analysis
- The price of platinum is at a 10 year low.
- Is it possible for it to recover without speculators?
Platinum has been overshadowed by gold and silver for a long time, despite its many uses in both industry and jewelry. It is exceptionally resilient and has special properties as a catalyst. In addition to its role in fuel cell based vehicle propulsion, it’s also used in the petroleum industry, playing a vital part in the process of refining crude oil into high-octance gasoline.
Even with such an impressive résumé, its popularity in the futures market still falls short of the dynamic duo that is gold & silver. The average daily volume of platinum futures traded on the CME in June was 30,000 contracts, compared to the 350,000 and 120,000 daily contracts of gold and silver.
Platinum recently fell back to it’s 2016 low. If this support line breaks, price could easily reach levels not seen since the subprime mortgage crisis. The period between October and November of 2008 was tough time for all financial instruments. When we’re in the midst of a booming ecomony and platinum still threatens to retrace price levels last seen during a global recession, it may be worth taking a closer look at its fundamentals.
Fundamentals - Supply
Unlike other commodities, platinum mining has been relatively stable for the past five years. Aside from a temporary drop in 2014, annual output has stayed consistently at around 6,000 troy ounces.
(all figures in thousand ounces)
Platinum is exceedingly rare and only a few countries have been able to capitalize on it. South Africa by itself accounts for three quarters of global production. Russia takes second place, despite only producing 15% of what South Africa does.
(all figures in thousand ounces)
This small number of participants makes the supply side stable, predictable and easy to price in, therefore demand will likely play a larger role in defining price.
Fundamentals - Demand
In the past few years, shifts in demand have traditionally moved within a 10% window. Platinum has been a key component in the manufacturing of diesel-powered cars, which were hit hard by the 2015 Volkswagen emisions scandal. Their market share in Western Europe fell from 53.3% in 2013 to 44.4% in 2017 and demand for platinum dropped accordingly.
(all figures in thousand ounces)
There’s also a shrinking market for it in the jewelry industry, since use of platinum in jewelry fell by one third (or 800 troy ounces.) since 2013. This gradual decline could simply be the result of changes in fashion and consumer preference.
Its not just industrial and retail buyers who shape it, we also have to take investors into account. It’s well known that for some commodities, speculators play a larger role in pricing than holders of the physical asset itself. Platinum may not be a reserve metal, however it’s still found in many portfolios as a cheap, long-term investment. Platinum is the backbone of many Exchange-Traded Funds whose share prices change based on the volume of futures and derivatives in they hold.
Investors make up the fourth largest segment of platinum demand. If we compare investor demand for platinum with price history, we can see that the 2013 prices were parallel to high investor demand and the shifting of their preferences coincides with the drop in price. When speculators rediscovered platinum in 2016, price rose by 31.5% within half a year, then dropped again as investor sentiment changed.
Investor demand is only a fraction of the volume needed by the manufacturing, however it’s the segment most prone to meet their demand on the futures market. As a result, the prices seen on exchanges reflect their behaviour closer than the behaviour of industries which actually use platinum. Traders of the physical asset are still present on the market, however for them futures primarily serve as a means to mitigate their risk, rather opportunity for profit. Meanwhile the ever-changing preferences of speculative investors act as a powerful driving force behind its price.
Sources:
https://www.acea.be/statistics/article/share-of-diesel-in-new-passenger-cars
https://www.platinuminvestment.com/supply-and-demand/platinum-quarterly
Sincerely,
Laszlo | Market Analyst
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