Can Chinese PMGs demand continue to grow in 2017?

CHINA December 30 2016 9:35 AM

NEW YORK (Scrap Register): Continued supply deficits are expected to boost platinum and palladium prices in 2017, with palladium outperforming due to its heavier use in the key auto markets of the US and China. 

“We’re positive on the platinum group metals, and we have been for some time,” said Mike Dragosits, senior commodity strategist with TD Securities. “We’re a little bit more positive on palladium than platinum.”

Expected supply deficits in the next year are likely to mean further draws in existing above-ground inventories of these metals, said Robin Bhar, metals analyst with Societe Generale. Their main industrial uses are for catalytic converters in motor vehicles.

TDS looks for the palladium-market supply deficit to double from 600,000 ounces in 2016 to 1.2 million in the next year. The firm expects the platinum deficit to rise from 400,000 in 2016 to between 600,000 and 650,000.

Societe Generale looks for continued but narrower deficits in 2017. Bhar calls for the platinum deficit to narrow to 140,000 ounces from 195,000 in 2016, and for a 2017 palladium deficit of 1.02 million ounces after 1.275 million in 2016.

Against this backdrop, SocGen sees the average palladium price rising to $750 in 2017, compared to an expected $620 in 2016. SocGen projects platinum averaging $1,040 in 2017 after $1,000 in 2016.

TDS sees palladium averaging $740 in 2017 and $790 in 2018. The bank looks for around $1,100 platinum in 2017 and $1,225 the year after.

“The main factors will be on the demand side. We still see growing auto-catalyst demand for both platinum and palladium,” Bhar said.

TDS looks for Chinese auto sales to outperform those in the U.S. and Europe, Dragosits reported. Chinese authorities recently announced an extension of tax incentives that helped 2016 sales.

A strong Chinese market tends to favor palladium, which are used for catalytic converters in gasoline-powered cars, which make up the biggest market share in China and the U.S. This is especially the case with China, since the country’s car market is still relatively young, meaning not as many old vehicles to scrap and therefore less recycled PGMs.

“That means each additional vehicle is a new source of palladium demand,” Dragosits explained.

On top of this, both metals have ongoing supply issues, analysts explained. The majority of the world’s mined platinum comes from South Africa, where supply is frequently dinged by labor and electricity issues. In the case of palladium, Russian state stockpiles have “fallen off the cliff” over the last two years, Dragosits said. Most analysts believe these stockpiles are nearly exhausted, meaning limited future supply from this source. Also, Bhar said, annual Russian palladium production may tail off.

However, Bhar commented that one area of PGM supply could increase in 2017 – recycling. This is due to higher steel prices incentivizing increased scrapping of automobiles, in turn leading to more recovery of PGMs from spent auto catalysts.

Analysts offered a mixed assessment of demand for platinum jewelry over the next year. China is the world’s largest consumer of this product.

Dragosits suggested this demand could be hurt by the depreciating Chinese yuan, which makes platinum more expensive in the local currency. However, Bhar said platinum-jewelry demand generally may pick up due to buying encouraged to the lower dollar-denominated platinum prices lately.

Bhar added that platinum should also benefit from increased demand by the glass industry. 

TDS looks for PGMs to draw additional support in the next year from a bounce in gold prices. He suggested the market “got ahead of itself” in decline in gold during the latter part of 2016 as it factored in a December rate hike from the Federal Reserve. TDS suspects policymakers may be more dovish than many expect next year, which could help gold recover. If so, that would be positive for gold and result in spillover buying of PGMs, Dragosits explained.