FxWirePro: South Africa continues to drive platinum’s bullish and bearish price scenarios

In platinum, mine production has so far proven relatively inelastic to lower prices.  Combined with a weak outlook for demand growth given eroding European diesel share following the Volkswagen emission scandal in 2015, platinum looks set to record some hefty market surpluses over the coming years.

In our opinion, the biggest question looming over platinum in the next couple of years is whether margin pressures and financial stress caused by lower platinum prices and high costs will reach a point where South African producers finally close a significant amount of loss making capacity in the country.

Bearish scenarios:

• South African mine production cuts fail to materialize as producers hold out for stronger pricing or see material closures as too politically costly;
• A weakening ZAR gives South African producers further margin cushion also prolonging cuts;
• Recycling growth is boosted more than expected as higher-pgm content diesel catalysts are scrapped;
• The diesel share in Europe falls quicker-than-expected causing fabrication demand to come in weaker;
• The Fed is more hawkish than expected in 2018, hurting precious metals prices.

Bullish scenarios:

• South African miners cut more production than expected, materially lowering supply outlook;
• Lower steel prices decrease outlook for scrappage rates and recycling supply growth;
• Chinese HDD vehicle platinum loadings increase more than expected, offsetting losses elsewhere;
• Platinum demand gains from substitution away from relatively higher cost palladium in the automotive sector;
• Continued US dollar weakness strengthens dollar-denominated commodity prices across the board.

The price of platinum halted its recent rally today but managed to stay beyond the $1,000 an ounce level and in positive territory for the year. Platinum, dropped 10% compared to the same period last year, is underperforming the precious metals complex and specifically palladium which is sporting 2017 gains of more than 37% and looks set to top its sister metal for the first time since 2001.

As per the latest report by the World Platinum Investment Council (WPIC) illustrates the platinum market moved back into surplus during the Q2 as a rise in refined supply (despite a 9% dip in mine-level output) and a drop in automotive and industrial demand erased the previous quarter's 305,000-ounce deficit.