LONDON (Scrap Register): Deutsche Bank reiterates their view that platinum fundamentals (especially the demand side of the equation) are not strong enough to pull clear of the influence of the South African Rand, and Gold.
Fundamentals this year are decent with robust European vehicle sales and increasing safety related stoppages in the South African mining industry resulting in a modest deficit market this year and next.
These deficits are not sufficient to draw down the c.2.3 million ounce of liquid stocks to the extent which results in any meaningful tightness. However, a strengthening Rand should see prices appreciate over the next few years in USD terms, with the strong correlation still holding.
According to Deutsche Bank, Platinum’s de-rating versus gold has run its course for now. The market seems to have priced in the bad news from Electric Vehicles and “Dieselgate”. The trading range for the discount to gold seems to be settling out between $200 – 300 an ounce.
Over the past two quarters, any move outside of this range was caused by sharp movements in the Rand, independently from any broad based USD strength or weakness. The “neutral” fundamentals mean that we think that platinum may settle in this trading range for now.
Given their view of a stronger Rand, ongoing wage negotiations in South Africa which are likely to be “noisy” combined with low producer inventories, the bank thinks there is a short term trading opportunity for platinum to trade to the top of the range from where it is currently at the bottom of the range.
Palladium’s strong Q3 performance is underpinned by the metal’s superior fundamentals. Deutsche Bank forecasts that the global above ground stocks will be drawn down by 2Moz over the course of 2016 and 2017E. This still means that c.4.2 – 4.5Moz of liquid stocks will remain post 2018, which is not low enough to drive a physical tightness.
Investor sentiment will hold sway and there are two potential catalysts on the horizon which could drive near term volatility. Deutsche Bank thinks there is a good chance that the tax break on small vehicles in China could be extended into 2017. This would be a positive catalyst over the next three months.
However, over the medium term, the US Auto cycle is starting to turn. Deutsche Bank base case forecasts are for a modest decline in sales for 2017E, but credit indicators do suggest rising stress which could see sales fall more dramatically. This is the main downside risk for next year.