ScotiaMocatta Precious Metals 2017 Forecast PGM December 2016 Executive Summary • PGM prices have once again fallen over themselves as they retreat from the 47 percent gains seen in the first eight months of the year. • Weak demand from the jewellery industry in China has not only seen demand fall, but has also added to supply as unsold jewellery has returned as scrap. • Industrial demand has generally held up well and is expected to see stronger growth in 2017 as global economic output recovers, but the market is nervous as it expects a slowdown in the auto industry in 2017. • For Palladium, demand from autocatalyst manufacturers has been the main bullish factor, while demand from the rest of industry has been slightly weaker. • Supply from primary sources has been fairly flat, but another year of ETF redemptions has added supply to the market, although not enough to prevent the supply-demand balance from being in a supply deficit. • Primary supply and consumption are expected to be flat to slightly weaker in 2017, although supply from recycled metal could see overall supply pick up. Conversely, we expect stronger prices to support investment and fund buying. Platinum Introduction Platinum prices have had a year of two halves in 2016; prices rallied to a high of $1,195/oz in August from a low of $811/oz in January, 2016, but have since fallen to a low of $889/oz. Investment and fund buying carried prices higher in the first part of the year, as the market followed Gold prices higher. Then demand and interest picked up in anticipation of strikes in South Africa, where wage negotiations were underway but not making progress. Selling then materialised well before any wage agreements were made. South African investors were strong sellers of ETFs as higher Platinum prices, combined with a weaker rand, prompted profit-taking. Wage agreements then followed and Platinum prices sunk further under the weight of fund long liquidation and weak Gold prices. Industrial demand has generally seen growth this year, but the clear area of weakness has been another year of falling demand from the jewellery industry and, more to the point, Chinese demand for jewellery. Jewellery demand is likely to be the swing factor for next year; any recovery in Chinese demand could well drive prices higher and attract investment interest too.
Transcript
ScotiaMocatta Precious Metals 2017 Forecast PGM December 2016
Executive Summary
• PGM prices have once again fallen over themselves as they retreat from the 47
percent gains seen in the first eight months of the year.
• Weak demand from the jewellery industry in China has not only seen demand fall,
but has also added to supply as unsold jewellery has returned as scrap.
• Industrial demand has generally held up well and is expected to see stronger growth
in 2017 as global economic output recovers, but the market is nervous as it expects
a slowdown in the auto industry in 2017.
• For Palladium, demand from autocatalyst manufacturers has been the main bullish
factor, while demand from the rest of industry has been slightly weaker.
• Supply from primary sources has been fairly flat, but another year of ETF
redemptions has added supply to the market, although not enough to prevent the
supply-demand balance from being in a supply deficit.
• Primary supply and consumption are expected to be flat to slightly weaker in 2017,
although supply from recycled metal could see overall supply pick up. Conversely,
we expect stronger prices to support investment and fund buying.
Platinum
Introduction Platinum prices have had a year of two halves in 2016; prices rallied to a high of
$1,195/oz in August from a low of $811/oz in January, 2016, but have since fallen to a
low of $889/oz. Investment and fund buying carried prices higher in the first part of the
year, as the market followed Gold prices higher. Then demand and interest picked up in
anticipation of strikes in South Africa, where wage negotiations were underway but not
making progress. Selling then materialised well before any wage agreements were made.
South African investors were strong sellers of ETFs as higher Platinum prices, combined
with a weaker rand, prompted profit-taking. Wage agreements then followed and Platinum
prices sunk further under the weight of fund long liquidation and weak Gold prices.
Industrial demand has generally seen growth this year, but the clear area of weakness
has been another year of falling demand from the jewellery industry and, more to the
point, Chinese demand for jewellery. Jewellery demand is likely to be the swing factor for
next year; any recovery in Chinese demand could well drive prices higher and attract
investment interest too.
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DEMAND
Platinum demand increased 2.8 percent to
8.3 million ounces (Moz) in 2015, according
to Johnson Matthey (JM). This was mainly on
the back of a rise in demand from investors
and from the key autocatalyst industry, while
demand from the other key volume
consumer, the jewellery industry, was
weaker. Platinum’s diverse consumer base
provides the Platinum market with numerous
swing factors that help to regulate supply and
demand during the economic cycle as each
group can be motivated by different events.
In 2016, demand is expected to be up 0.4 percent at 8.33 Moz, with further significant falls from
jewellery manufacturing being offset by increases across other sectors.
Autocatalyst demand
Platinum’s use in autocatalysts accounted for 39% of total demand and 65% of industrial demand in
2015, which was little changed from the year before. Autocatalyst demand consumed 3.27 Moz in
2015, which is still less than was used before the financial crisis. At its peak in 2007, some 4.2 Moz
were used, which fell to 2.19 Moz in 2009, but a steady recovery has since been underway with
forecasts of 3.32 Moz being used in 2016. Although vehicle sales have been strong in 2016, with
European registrations up 7.2 percent in the first ten months of the year, diesel’s share of the EU auto
market has slipped to around 49 percent from 53 percent in 2014 – the year before the VW scandal.
However, Euro6b emission regulations have meant an increase in average loadings in diesel catalytic
convertors, which has helped offset the loss of market share. China is also tightening emission
regulations for diesel vehicles, which should
pick up next year and again in 2018. The
trends in Platinum’s use in the autocatalyst
industry stand out in the chart opposite;
Europe is the main user, because of its
preference for diesel-engine vehicles and
demand has been increasing. Demand in
Japan has slowed as in recent years auto
manufacturers are finally getting in line with
the rest of the world and are reducing
Platinum loadings in autocatalysts for petrol-
fuelled vehicles. The low levels of demand in
North America and the rest of the world highlight that these regions have a preference for petrol
vehicles. Indeed, VW will no longer be offering diesel models to the US. Looking forward, with
Platinum demand so concentrated in Europe and with Euro6b regulations now in force, the degree to
which Platinum demand increases is likely to depend to a great extent on how Europe’s vehicle sales
perform. Moody’s Investors Service are not bullish, they forecast that European sales will contract
modestly in 2017. For global growth, they expect softer demand following an extended period of
growth in key markets. For China, they expect demand growth to slow to 2.7 percent in 2017, from 6.7
percent in 2016, as the tax incentive on buying smaller vehicles is likely to finish at the end of 2016. In
the US, near-full employment and good credit availability have underpinned a strong US auto market,
but expectations are that sales will peak in 2016 at around 17.5 million units but then start to decline
in 2017. All in all, therefore, the outlook for the global auto industry in 2017 is not bright and we expect
Platinum demand in this sector to fall by around two percent.
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Jewellery demand
The jewellery industry is the second largest
user of Platinum, consuming 34 percent of
total demand in 2015 according to JM, but
demand has been falling in recent years. In
2015, demand was 2.83 Moz; it peaked at
3.03 Moz in 2013, fell 4.3 percent in 2014, 2.3
percent in 2015 and is expected to have
slumped 9.1 percent in 2016. This means
demand in 2016 was some 15 percent below
that of 2013. China is by far the largest
market for Platinum jewellery, consuming
around 64 percent of the market in 2015,
while Japan accounts for 11 percent, North America 9 percent and Europe 7 percent. As the chart
above shows, it is the fall in demand for Platinum jewellery in China that is hurting demand most. In
2015, China consumed 1.8Moz of Platinum in jewellery, down from a peak of 2.1Moz in 2013, and in
2016, Chinese demand is expected to fall 15.6 percent to 1.52 Moz, according to JM. 2016’s
consumption is therefore nearly 28 percent below that of 2013. You would expect jewellery demand to
be price elastic and up until 2014 it was, as the chart below shows. Prices started to fall in 2012, and
as they fell demand climbed until 2013, but
since 2014, demand has fallen despite prices
falling. The breakdown in price elasticity
happened in China and in Europe. Austerity
measures in Europe weighed on demand for
luxury items and in China factors such as
President Xi Jinping taking the helm late in
2012, his anti-corruption clampdown leading
to a marked slowdown in gifting of high value
items, a sluggish property market and a
slowing economy, seem to have changed
consumers’ habits on spending on luxury
items. The steep decline in Platinum prices that started to accelerate in September 2014 and
continued until November 2015, with spot Platinum prices dropping below spot Gold prices in January
2015, also tarnished Platinum jewellery’s image (as well as that of Gold jewellery) as a good store of
value. That said, in the second half of 2015, low prices did lead the Chinese jewellery industry to
restock and expand, which boosted wholesale demand for Platinum, but poor jewellery sales over the
Chinese Lunar New Year in 2016 led to a period of destocking. There are also reports that jewellery
retailers are not pricing Platinum jewellery in the same way they do Gold jewellery; Platinum jewellery
has a higher mark-up, given higher fabrication costs, but when Platinum jewellery is part-exchanged,
the trade-in value is deemed to be low. All in all, investment interest in precious metal jewellery has
been suffering and it may well be that it takes a return to more prosperous times before jewellery
demand recovers. There are some thoughts that China has lost its appetite for expensive jewellery
and that the allure of expensive gadgets/mobile phones and branded luxury goods has taken over.
While this is no doubt true to some extent, we still remain bullish for jewellery demand in China and
see plenty of potential for organic growth as households become more prosperous. While the run up
in prices in the first half of 2016 may not have been trusted and therefore did not attract a recovery in
jewellery demand, we think that once the latest pullback in prices has run its course and a higher
base is seen to be in place, then bargain hunting will emerge. In addition, if interest in property wanes
for a while, more disposable income may well be rechannelled back into the likes of jewellery,
especially as precious metals would offer some protection against a weakening yuan. As such, we are
not as gloomy as some on the demand outlook for jewellery in China in 2017. In other regions,
demand in India suffered in the first half of 2016 on the back of the jewellers’ strike, but generally
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demand is strong and is expected to grow 15 percent in 2016, helped by strong promotional
campaigns. These include promoting Platinum jewellery for men and the on-going marketing
campaign called ‘Evara’ which is promoting the idea that parents give marrying couples a Platinum
jewellery set, with items of jewellery for both the bride and the groom. Given that Platinum prices are
below those of Gold, it seems logical to expect Platinum jewellery to win market share from Gold
jewellery. In 2016, demand for Platinum jewellery is expected to fall the most in Europe and China, be
down around 3 percent in Japan and North America, but to grow 22 percent in the rest of the world.
The rest of the world collectively accounts for around 13 percent of Platinum jewellery demand.
Jewellery has a tradition of being a swing factor of demand as demand tends to be price elastic; in
recent years this pattern has broken down, but we see that as a temporary departure from the norm.
Just as Platinum jewellery demand is doing well in India, we think strong organic demand will return in
China once the economy starts to see stronger growth, which we expect will start to unfold in 2017.
With prices low and below those of Gold, we expect the slide in jewellery demand will halt in 2017,
with demand likely to recover as the year progresses.
Industrial demand
Industrial demand, excluding the autocatalyst industry, accounted for around 21 percent of total
demand in 2015, and the main users within this sector are the chemical, electronics, medical, glass
and petroleum industries. The chemical sector accounted for 32 percent of industrial demand, the
electrical and medical industries each consumed around 13 percent, the glass and petroleum
industries accounted for around 8 percent each and other applications consumed around 25 percent.
Demand from the petroleum and glass industries tends to fluctuate in line with changes in capacity;
use in electronics is more a function of industrial production, while the medical industry is expected to
see steady organic growth. Global manufacturing growth is edging higher with the global
manufacturing PMI around 52 in October 2016, which was the highest since October 2014, according
to JPMorgan/IHS reports. Growth accelerated to a one-year high in the US, a 33-month high in the EU
and China’s reading was at a 27 month high. Although growth is slow, it appears to be improving and
considering sluggish growth over recent years there may well be some pent-up demand. In addition,
assuming there has been destocking into the slowdown, a return to growth may well start to see some
restocking. Lower oil and therefore fuel prices in 2015 hit demand for synthetic fuels and as a
consequence a number of gas-to-liquid refinery projects, which use significant amounts of Platinum,
were cancelled and operations at some existing plants suspended. China has been on a drive to
become more self-sufficient in some chemicals, which has led to the building of capacity, even though
there is no global shortage. Likewise, demand for fibreglass has increased as a call for strong but
lighter materials has seen it combined with plastics to produce light composite products to replace
steel, where possible, for the auto industry. A pick-up in global growth bodes well for industrial
demand, but shifts in technology and consumer trends mean the industrial uses remain dynamic. For
example, there is a shift underway from hard disc drives (HDD) in computers, which use Platinum, to
solid state drives (SSD), which have no Platinum content. However, those HDDs that are being used
tend to have more storage capacity, i.e. more discs, so more Platinum is being used per item. In
recent years, Platinum’s use has been quite choppy year on year as much depends on when new
capacity is built. In 2016, JM forecast that 1.95 Moz of Platinum will be used in industrial applications
ex-autocatalysts, the average per year since 2011 being 1.77 Moz, with a range between 1.51 to 1.98
Moz per year. In line with our expectations for stronger economic growth in 2017, we expect industrial
demand to increase.
SUPPLY
Supply of Platinum comes from three sources: mining, recycled material and from stocks. The black
sections at the top of the columns in the chart below show the amount of stock needed to balance the
market. As such, since 2012 the Platinum market has been in a supply deficit. Geographically, South
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Africa produces around 75 percent of global mined Platinum, Russia produces 11 percent, Zimbabwe
7 percent, North America 5 percent and other countries 2 percent.
Total supply has recovered since mining output was hit hard by the five month strike in South Africa in
2014, but it has yet to return to the peak level of 2013, and the market remains in a deficit.
Mine supply rebounded 18.8 percent in 2015
to 6.11 Moz, this after having fallen 11.9
percent to 5.14 Moz in 2014, with the fall in
South African output due to the strike
accounting for 97% of the fall in global supply
that year. In 2016, mine supply is expected to
drop slightly, by 1.7 percent, to 6.01 Moz. Mine
output has fallen the most in South Africa in
2016, due to production stoppages, especially
refined production, but this has led to a pick-up
in pipe-line/concentrate stock at producers.
Outages and lower ore grades have reduced
South African mine output and mine output in Russia has slipped for similar reasons, although sales
of refined metal from stock have more than made up for any short-fall. However, refined production
has been ramped higher in Zimbabwe, as producers were able to process stockpiled mine output from
recent years. Output in North America also climbed as primary producers lifted production, as did by-
product producers in Canada. In Russia and Canada, most Platinum production comes as a by-
product of nickel and copper mining. A strong rebound in nickel prices in 2016 has encouraged output
to be stepped up.
The South Africa PGM industry avoided further mass strike action in 2016. At the start of the contract
negotiations it looked highly likely that strikes would be called, but that was avoided and new three-
year labour contracts have been signed. These should bring some stability to the country’s PGM
industry. At present in South Africa, new mining operations are being ramped up, but output at older
mines is falling – the net effect is that output is expected to be only slightly higher in 2017, although
taking into account likely production disruptions that may not end up being the case. Hardship in
recent years has led to cuts in capital expenditure, so the country may struggle to increase output to
any degree. A weaker rand has, however, boosted producers’ revenues in local currencies.
Supply from other producing countries is expected to stay generally stable. Russia may suffer some
re-organisation issues, which could hit refined production in Q4’16 and Q1’17, but any shortfall is
expected to be made up with sales of stockpiled metal. Output in Zimbabwe is expected to fall in 2017
compared with 2016, as 2016’s production was boosted by the processing of stockpiled ore that had
built up in 2015. North American supply is expected to be flat too, with the next increase expected to
be seen in 2018, when Stillwaters’s Blitz mine starts up.
Recycled material
Recycled Platinum comes from old autocatalysts, old jewellery and more recently from recycled
electrical equipment. This sector of supply should see organic growth but supply tends to be price
elastic, with collectors of scrap holding on to it when PGM prices are low, which means supply from
recycled material is cyclical. Since 2011, supply from recycled metal has fluctuated between 1.73 Moz
and 2.07 Moz. In 2015, supply from recycling was 1.73 Moz, which was down 16.5 percent from 2014,
with low prices accounting for the drop. The one area of recycling that seems price inelastic is the
electronics industry, where government legislation is driving supply.
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The bulk of recycled metal comes from the recovery of autocatalysts, which made up 65 percent of
scrap in 2015, with scrap from jewellery accounting for 33 percent and electronics around 2 percent.
Recycled metal from spent autocatalysts is likely to be a market that sees steady growth, for now;
year-on-year supply changes depend on how long cars are kept in service and in hard economic
times, vehicles tend to be kept longer. But, in 2015, the combination of low steel prices meant the
recycling of vehicles slowed and on top of that, some of the PGMs recovered were also held back due
to the low PGM prices. On balance though, the volume of autocatalysts being recovered is set to
grow, however the amount of PGM retrieved from each unit may start to fall as PGM loadings in
catalytic convertors from ten years ago were decreasing due to thrifting. Recovery from electronics is
likely to follow a similar path to autocatalysts, but recovery of metal from jewellery is expected to be
much choppier.
Scrap from old jewellery is also price elastic, so the amounts of scrap from jewellery climbed between
2010 and 2012 when precious metals prices were rising strongly, but rates then slipped in recent
years as low prices made it less attractive to cash in old jewellery items. In addition, although
Platinum prices are trading below those of Gold, at jewellery stores in China Platinum jewellery pieces
tend to have a bigger mark-up than Gold pieces, so when old Platinum jewellery is used to exchange
for new pieces, the discount between old pieces and new pieces is high and that has dissuaded
jewellery from being exchanged. One unexpected feature that has surged in 2016 is scrap jewellery
supply from China. In the second half of 2015, falling prices prompted jewellers to restock but
consumers did not buy as much as expected, especially around the Lunar New Year holiday in 2016
– as a result jewellery retailers had to destock, with some outlets closing down. More than a usual
amount of unsold stock has therefore been returned to the market as scrap. In 2016, scrap from
jewellery is forecast to rise to 709,000oz, from 574,000oz in 2015, according to JM.
For 2017, we expect supply from recycling to drop as there should be a fall in the amount of old
jewellery being returned from retailers in China, while a slowdown in auto sales should mean less
vehicles are scrapped. The run up in PGM prices in the first seven months of 2016 should also have
enticed out more hoarded scrap that had built up in 2014 and 2015.
Investment demand weakens
Investor interest in Platinum has recovered
over the past two years having fallen to a low
in 2014, but different areas within the
investment field have performed quite
differently. ETF holdings peaked in July 2014,
but have been trending lower since, although
there have been strong bouts of buying along
the way. One of the exceptionally strong
areas of interest has come from Japanese
investors, where demand for ETFs and bars
have been strong. A combination of falling
dollar Platinum prices and a strengthening
yen has made yen-denominated Platinum prices considerably cheaper, with prices falling from around
Yen 5,000/g to a low of around Yen 3,100/g. In 2015, physical investment in Japan climbed to
390,000oz, compared with an average of 110,000oz in the 2011-2014 period. With yen-Platinum
prices around Yen 3,345/g (at the time of writing), and with the currency showing some weakness
since the US election, there may well be further demand for Platinum bars. Conversely, one of the
South African ETFs we follow saw holdings peak in July 2015 at 1.25 Moz, but it has since steadily
fallen to 0.78 Moz. A weak rand meant the run-up in Platinum prices denominated in rand earlier in
the year took rand-based Platinum prices to levels not seen since 2008, which seems to have
prompted profit-taking. In addition, mining equities have been booming, so the opportunity cost of
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holding PGM ETFs may have been too high a price to pay. So far in 2016, total ETF holdings stood at
2.342 Moz in mid-December; they ended 2015 at 2.374 Moz, so have not changed much. As
suggested above, South African ETFs have seen the largest redemptions, while gains have been
seen in the UK, US and Japan – we expect lower prices to lead to bargain hunting in 2017.
Funds
The net long fund position (NLFP) ran up to a
fresh high of 55,949 contracts on 9th August,
2016, from a low of 18,426 contracts in
December 2015. The previous highs in 2013
and 2014 had been either side of 50,000
contracts. The run up in the first eight months of
2016 was on the back of fresh buying and short-
covering – the correction since the August peak
has been driven by long liquidation and fresh
selling, although since November shorts have
been covering into the weaker prices. The
NLFP (at 25,616 contracts in mid-December) is
back at a relatively low level and below average for the year. Both the gross long and short positions
are mid-range, which means funds could now influence the market either way.
Technical
Spot Platinum prices have sold-off again; the market put in a strong rebound between January and
August, with prices gaining $384/oz, but they have since given back 80 percent of the gains and are
$107/oz above the January 2016 low. The stochastics are bearish and a series of lower lows and
highs depict a bear market, as does the 25 percent fall in prices since the August peak. On the
monthly chart, prices are looking relatively low. Prices are now back at levels that were just below the
top of the range that they held between 2004 and mid-2005. The lower levels of the range in that
period were between $815/oz and $758/oz. The support line linking the 2008 low with the 2015 low is
at $819/oz, some $100/oz below where prices were at the time of writing. As such, we would expect
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solid support either side of $800/oz. Should a rally get going, then the long term down trend line is at
$1,325/oz, although ahead of that is the August 2016 high at $1,195/oz. The 38.2 percent Fibonacci
retracement line of the 2011 to January, 2016 low is at $1,233/oz.
Conclusion and Forecast
The extent of the pullback in prices in the second half of 2016 has been surprising, especially when
you consider supply has been lower than in 2015. The main reason for the price weakness is the drop
in demand for Platinum jewellery and, to be more specific, the drop in China’s demand for jewellery. A
number of factors are behind the decline in demand, notably that the gifting of luxury items between
company officials in China has dropped off on the back of the anti-corruption campaign – this is an
area of demand that is likely to be lost for good, but individual demand for jewellery is expected to
bounce back and become a long term area of organic growth fuelled by a growing middle class.
Industrial demand is expected to recover in line with our expectations for stronger economic growth in
2017, but demand from the autocatalyst industry is expected to fall in 2017. Supply in 2017 is
expected to fall, with mine output slightly lower and supply from recycling dropping (the latter mainly
due to a drop off in the amount of unsold items that Chinese jewellers have recycle), but also a slower
auto market is likely to mean less vehicles are scrapped. For 2017, we believe prices will bottom out
again before too long and that a broader-based economic recovery, led by China and the US, will
prompt some restocking and a rebound in confidence that may well lead to a pick-up in jewellery
buying. Investment buying is also expected to take advantage of low Platinum prices, especially with
prices so far below spot Gold prices. We expect a trading range between $875/oz and $1,250/oz, with
prices averaging around $1,070/oz.
Palladium
We said in last year’s Forecast that ‘Palladium price performance seems at odds with the metal’s
fundamentals, the market having been in a supply deficit for four years (including 2015) with the last
surplus seen in 2011’. 2016 has seen that corrected, with prices rallying to $776.50/oz so far this
year, having been as low as $452/oz in January 2016. Trading in 2016 has been quite choppy with an
initial rally to $635.50/oz followed by a correction to $523.50/oz, then a rally to $747.50/oz, followed
by a correction to $611/oz, before the latest rally which has taken prices to levels not seen since June
2015. Demand from the auto industry has been strong in 2016; it is expected to consume an
additional 185,000 oz this year, according to Johnson Matthey (JM), which will more than offset small
declines in Palladium’s industrial consumption. The main area of weakness has been in investment
demand where redemptions in ETFs have continued for a second year running, with 0.66 Moz of
outflow seen so far in 2016, on top of around 0.7 Moz of redemptions in 2015. Given the level of
redemptions compared with the increase in physical demand it is, on the surface, surprising that
prices have managed to rally at all. However, despite the marginal changes in supply and demand,
gross demand is significantly higher than primary supply so extra supply has to come from stocks.
Even with the redemptions in ETFs, the market has been in a supply deficit since 2012 and has
therefore relied on a drawdown in stocks to balance the market. Looking into 2017, we expect
fabricated demand to be fairly flat as we expect auto sales growth to slow down considerably. Primary
supply is also expected to be fairly flat, but there could be a pick-up in supply from recycled scrap, as
supply from this area has been lower than expected in recent years. But, with prices picking up, more
hoarded scrap is expected to enter the supply chain.
In 2017, we think the swing factors in supply will be the degree to which supply from recycled material
picks up and on whether redemptions from ETFs continue, while on the demand side, we do see the
level of investment and fund interest as determining whether there are surprises on that side of the
equation. Fund buying has already started to pick up momentum, so we wait to see if that changes
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ETF investors’ attitudes. For 2017, we are mildly bullish on prices, from these already relatively high
prices.
Autocatalysts
Palladium’s use in autocatalysts has
grown in importance in recent years and
the trend is expected to continue. As the
chart opposite shows, all regions except
Japan have seen demand trend higher,
although it has slowed down in the rest of
the world region, but we put that down to
hard economic times with auto sales in the
likes of Brazil and Russia suffering
significantly in recent years. A combination
of a recovery in auto sales and stricter
emissions legislation is driving demand in
most regions, with North America and China seeing strong recovery/growth in petrol-driven vehicles
sales, while Europe’s demand for Palladium has grown at a slower pace due to its preference for
diesel vehicles that have traditionally been Platinum-based, rather than Palladium-based. That said,
more Palladium is now being used in diesel autocatalysts. In Japan, although vehicles tend to be
petrol-driven, autocatalyst manufacturers have up until recently stuck with using Platinum-based
autocatalysts, but that is starting to change, with manufacturers now coming in line with global
manufacturers who use Palladium autocatalysts for petrol-driven cars.
It looks likely that the trends in auto sales will change in 2017 – after two strong years of sales in
Europe, China and the US, sales are expected to slow down next year. This is especially likely in
China, where there has been a tax incentive to buy cars with smaller engines. As a result, car sales
have been growing above 20 percent in recent months as buyers rush through purchases before the
tax incentive is due to finish at the end of 2016. Like previous government incentives around the
world, once the incentives finish there tends to be a sharp drop in sales for a while. This is expected
in China, although organic growth, especially in smaller cities, is expected to remain strong. In
addition, the roll-out nationally of China5 emission regulations should see more Palladium used per
catalyst. Moody’s Investors Services expect demand growth in China to slow to 2.7 percent in 2017,
from 6.7 percent in 2016. The China Association of Automobile Manufacturers, CAAM, has joined
forces with car manufacturers to lobby the government to extend the policy. If successful, then
stronger than forecast growth in sales may be seen, but with sales rates already ballooning since July
in anticipation of the tax incentive stopping, there may well be a dearth of buying in the early part of
2017 anyway.
All in all, Moody’s Investors Services are not bullish for auto sales in 2017 - globally they expect softer
demand following an extended period of growth in key markets. In Europe they expect sales to fall
slightly and in the US, sales are expected to peak in 2016 at around 17.5 million units, but to then
start to decline in 2017. That said, there does seem to be some rebound in demand for sales in
emerging markets ex-China, especially in India, so sales in the rest of the world region may provide
some cushion from weaker sales in developed markets.
Other industrial uses
Palladium’s other industrial uses include electronics, industrial manufacturing including chemicals and
pharmaceuticals, other emission control equipment for factories, and petrol-powered machinery, such
as marine engines and garden equipment and in dentistry. In 2015, these industries accounted for 20
percent of Palladium demand, but the amount of metal used in these applications is falling as
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10
technology changes, although within these
sectors some applications will see organic
growth. Between 2011 and 2012, these
industries consumed an average of 24
percent of Palladium demand, which
averaged 2.3 Moz, but this has fallen to 2.0
Moz in 2015. As the chart shows, the main
area where demand is falling is the electrical
industry. Globally, demand for electrical
goods has been falling in recent years, with
shipments of computer equipment, digital
TVs, digital cameras and SatNavs suffering
– this probably as a result of all the things
that smartphones can now do. Your
smartphone can be a camera, a video camera, a SatNav, a voice recorder and an answering
machine, while you can watch streaming videos and TV on laptops and tablets. Judging by the slope
of the red-dotted line in the chart above, the fall in demand from the electronics industry seems to
have run its course, so demand from that industry is now expected to level out. Palladium’s use in
dentistry is in decline and that trend is expected to continue, while use as catalysts in the chemical
industry is cyclical depending on when new capacity is built, but it is suffering from the impact of
thrifting. The areas where we do see organic growth are in catalytic convertors for petrol-powered
machinery and emission control equipment in factories – these items come under the ‘other’ category
in the chart, where use has grown from 100,000 oz in 2011 to an expected 150,000 oz in 2016.
Jewellery demand
The use of Palladium in jewellery is in decline;
it consumed 2.3 percent of total Palladium
demand in 2015, down from 19 percent in
2005. Needless to say, Palladium jewellery
has had an interesting past ten years or so.
Demand took off in 2004 as higher Platinum
prices started to squeeze the profit-margins of
Platinum jewellery manufacturers, especially in
China. Platinum jewellery has been a swing
factor within the Platinum market for years, so
when prices started to climb above $850/oz in
early 2004, demand for Platinum jewellery
started to fall and jewellery manufacturers
started to use Palladium, which in early 2004
was trading around $200/oz. The potential
profit margins meant demand soared. In 2003,
some 250,000 oz of Palladium was used in the jewellery industry; it climbed to 925,000 oz in 2004,
1,425,000 oz in 2005 and then averaged 1,025,000 oz between 2006 and 2008. But, as the chart
shows, the bottom has fallen out of the market in China with some jewellers scrapping jewellery
pieces as they are not selling. In other countries, demand has flattened as the metal has carved out a
niche market as a metal for men’s jewellery. However, Japan’s interest for Palladium jewellery seems
to be waning again and that might be happening because Platinum’s premium to Palladium has
eased. The premium is last at $237/oz, down from $290/oz a year ago and $430/oz two years ago,
from $700/oz at the end of 2013 and closer to $1,000/oz in 2012. Platinum’s discount to Gold prices is
another factor that makes Platinum look relatively cheap.
Precious Metals Forecast - PGM December 2016
11
For 2016 and 2017, we expect Palladium demand from the jewellery industry to continue to fall, albeit
at a slower pace as Chinese demand for pure Palladium pieces of jewellery drops to zero, but its use
in an alloy to make white-Gold continues. Given Japan’s affinity for Platinum, we expect Platinum
prices’ continued discount to the Gold price to boost Platinum sales at the expense of Gold, white-
Gold and Palladium. Given Palladium jewellery has found niche markets in other countries, in time it
may do so in China and then the size of the potential market could see a meaningful pick-up in
demand, but there are no signs of this happening yet. For now, we expect the niche markets for
Palladium jewellery in Europe and North America to continue, but they may face competition now that
the price differentials between Gold, Platinum and Palladium have narrowed.
Supply
Total Palladium supply (including recycled
metal and supply from ETF redemptions)
amounted to 9.56 Moz in 2015, up from 8.86
Moz in 2014, a rise of 7.9 percent, which was
on the back of the recovery in South African
mine production after the long strikes seen in
2014. Mine supply accounted for 67 percent,
recycled material 26 percent, and sales from
ETFs 7 percent, according to Johnson
Matthey (JM) data. As the chart opposite
shows, supply from Russia has been trending lower, but appears to have flattened out in 2016; output
in South Africa dropped in 2014, recovered in 2015, but has eased this year, while in North America
and other producing countries, notably Zimbabwe, production has edged higher again this year.
The main change in recent years has been the drop in supply from Russia, most of this as the result
of declining sales from stockpiles, but mine supply has also eased in recent years. Between 2004 and
2010, Russian sales from stockpiles averaged 1.2 Moz per annum. They dropped to 0.78 Moz in
2011, 0.26 Moz in 2012 and 0.10 Moz in 2013 and appear to have since dried up, with the view being
that surplus stocks have been depleted. Russian mine output has trended lower in recent years to
2.43 Moz in 2015, from 3.2 Moz in 2006.
Global primary supply is expected to edge higher by 0.6 percent in 2016, with South African mine
output expected to edge higher on the back of better ore grades and higher mill throughput, but
overall supply from the country is expected to fall 113,000 oz as producers sell less from stockpile.
The opposite is happening in Russia, where the implementation of a structural change with
Nornickel’s closing of its old smelter at the Norilsk mine site is resulting in the processing of PGMs
being transferred to its Kola division and to its
Harjavalta site in Finland. This is expected to
lead to a refined production fall in Q4’16 and
Q1’17, but sales from Nornickel’s stocks will
more than make up for loss of refined output.
Supply from Russia is expected to rise by
around 53,000oz in 2016, while a pick-up in
mine output and mill throughput in the US and
from by-product supply in Canada, are
expected to lead to an increase in supply of
some 60,000oz – Zimbabwe’s production of
stockpiled ores is expected to see production
increase by a similar amount.
Precious Metals Forecast - PGM December 2016
12
For 2017, mine output is expected to be flat; supply from Russia is expected to continue to drift lower,
while in South Africa, the mining of some Palladium-rich ores should see output rise, but taking into
account the likelihood of production disruptions in South Africa we expect overall supply to remain flat.
Likewise in Zimbabwe, having processed stockpiled material in 2016, production in 2017 is likely to
drop back to the 325,000 oz level from 380,000 oz in 2016. In North America, output is expected to
edge higher in 2017, as stronger nickel and copper prices lead to a pick-up in by-product production.
The next main increase in North America is expected to start to be seen in 2018, when Stillwater’s
Blitz PGM project starts to ramp up production. Production capacity is expected to reach between
270,000-330,000 oz of PGMs, three-quarters of which is expected to be Palladium, once it is fully
operational in 2020-2021.
Supply from ETFs was seen in 2011, 2013, 2015 and 2016, with around 0.7 Moz redeemed in 2015
and 0.48 Moz redeemed in the January to November period in 2016. Given an expected supply deficit
over the next few years and a pick-up in Palladium prices in recent months, we would not be surprised
to see investors return as net buyers in 2017, which would then remove ETFs redemptions as a factor
of supply.
Recycling
With primary production from mining supply at around 6.5 Moz and with global demand running at 10
Moz, the palladium industry is dependent on supply from recycling. In 2015, supply from recycled
material totalled 2.46 Moz, which was more than the 2.43 Moz Russia supplied. Supply from recycled
material should be a growth market as the world’s vehicle population has been growing at a fast pace
over the past decade and as more countries over the past 15 years have had emission control
regulations. Supply from recycled electronics should also be a growth industry, while supply from
recycled jewellery is in decline in line with the drop off in popularity of Palladium jewellery in China in
recent years.
In 2015, supply from recycled autocatalysts dropped 11.4 percent compared with 2014. It would
appear that low metal prices for PGMs, as well as steel, led to the hoarding of scrap as scrap
collectors waited for better metals prices before selling material to recyclers. In 2016, recycled
palladium from autocatalysts is expected to climb 4.8 percent to 2.03 Moz, according to JM, but that
will still be some 7.2 percent below the peak of 2.19 Moz in 2013. As such, although the run up in
prices in 2016 does seem to have spurred more scrap into the supply chain, it does still look as
though there may be hoarded material still waiting to be recycled. This is especially so as strong auto
sales in 2015 and 2016 should have led to a pick-up in the number of vehicles being scrapped, at
least in the mature markets. Therefore, we expect a pick-up in supply from recycling in 2017,
especially as spot Palladium prices are back at levels not seen since June 2015 and prices are 67
percent above the lows in January 2016.
Supply from recycled electronics was 0.48 Moz in 2015, accounting for five percent of total supply.
Over the past six years, supply has ranged from between 0.43 Moz and 0.48 Moz. As more old
electronic equipment, such as video players, cameras and HiFi systems, is scrapped, we would
expect growth in this area to edge higher.
Supply from recycled jewellery amounted to 46,000 oz in 2015; it is in decline, in 2011 it amounted to
210,000 oz. We expect the supply from this sector to remain low.
Investment demand slows
ETF investors’ interest peaked in 2014, holdings held up relatively well until October 2015, but have
since dropped sharply. The timing of the pick-up in redemptions ties in with expectations that the Fed
would raise interest rates in December 2015. Throughout 2016, ETF Palladium holdings have
Precious Metals Forecast - PGM December 2016
13
continued to sink, this despite the
strong rally in prices. The bulk of
the redemptions have been made in
the US and South Africa. The latter
we think is due to the fact that the
African ETFs were only launched in
April 2014 when Palladium prices
were around Rand 8,000/oz and,
having seen rand prices down to as
low as Rand 6,780/oz in August,
2015, the recovery back above
Rand 8,000/oz and rally in 2016 to
Rand 10,700/oz has prompted
profit-taking and a degree of rolling
out of ETFs and into dividend paying mining equities. The run up in spot Palladium prices above
$750/oz in November has again led to more profit-taking. Given that the supply/demand outlook for
Palladium looks strong, there may be some rotation back into ETFs from investments in broader
markets if safe-haven demand picks up, but for now the trend in Palladium ETF holdings looks
bearish.
Funds
Fund activity in 2016 has been quite on/off. Trading was subdued in January and February, but then
picked up a gear in March. The net long fund position (NLFP) climbed rapidly to 15,766 contracts on
9th August from a low of 2,257 contracts on 1
st March, it then dropped back to a low of 4,969 contracts
on 1st November, before climbing again. As of 12
th December, it stood at 15,139 contracts. What is
noteworthy is that the drop in the NLFP in the second half of the year was driven by long liquidation,
not by fresh short selling, which implied the market was not bearish per se, but thought the upside
had run its course. What is surprising is
the disconnection between funds
trading the futures and investors’
interest in ETFs. With spot Palladium
prices rallying strongly during the whole
of November, fund longs have started
to accumulate again and shorts have
been covering. With the market
seemingly focused on the supply deficit
next year, sentiment for spot Palladium
seems to have improved. With the
NLFP at 15,139 contracts, it is well
below the high of 30,090 contracts in
September 2014. The gross short
positions are relatively low, as shown by the red line in the chart above. With spot prices now
correcting, we wait to see if the longs take profits, or see this as an opportunity to accumulate. For
now, the decline in the gross short position suggests that the shorts are not getting bearish into the
correction..
Technical
Palladium prices started to rally in early 2016, having been in a down trend since September 2014.
Spot prices found a base in January, 2016 around the 61.8% Fibonacci retracement level of the 2009-
2014 rally. Having dropped some $460/oz from the 2014 high, prices have now rebounded
Precious Metals Forecast - PGM December 2016
14
$324.50/oz. This year’s rally has broken through the down trend line and an uptrend line has provided
support on three occasions so far this year. Spot prices now look well placed to push higher to
challenge supply in the $850-900/oz range.
Conclusion and Forecast
Palladium’s supply fundamentals look supportive, although this latest run up in prices may well attract
more hoarded scrap into the market to be recycled. Supply from primary sources is expected to be
restricted around 2016 levels. The demand side of the equation is also likely to be subdued, as auto
sales growth is expected to level off in the main markets, although we are optimistic about a recovery
in sales in emerging markets. With ETF redemptions being a factor of supply in recent years, it will be
interesting to see whether higher prices attract more selling, or whether they attract fresh buying.
Fund buying has picked up into the latest rally, so after significant redemptions in recent years, it may
be that investors get more bullish for the metal again. Overall, we expect price direction in 2017 to be
set by funds and investment interest. For now they are polarised, but as we are generally bullish for
Gold prices and we expect global economic growth to pick up in 2017, Palladium as an industrial
precious metal that faces a supply shortfall may well attract investors’ interest.
For 2017, we would look for prices to trade in the $600/oz to $900/oz range, with prices averaging
around $780/oz.
Rhodium Outlook
Rhodium prices appear to have put in a
base around $620-625/oz in December
2015, turning higher as 2016 got underway
as was the case with the other precious
metals. Prices ran higher in the second
quarter to around the $740/oz level, pulled
back to test the former lows in June/July,
Precious Metals Forecast - PGM December 2016
15
before starting to climb again. Like the other PGMs, weak demand from the auto industry following the
financial crisis in 2008 led to a build-up of producer stocks that has weighed in the market since.
Unlike Platinum, Palladium, Gold and Silver, investment demand for Rhodium is limited. There are a
few Rhodium ETFs and investment bars are available, but the metal could not be considered a
mainstream investment. That said, the fact there are vehicles to invest in Rhodium may see investor
interest pick up once the fundamentals turn more bullish as investors would no doubt like the fact that
Rhodium prices rallied to $10,000/oz in 2008 and have been down to the low $600s/oz in 2016.
Demand
Rhodium’s biggest market is autocatalysts where 81 percent of the metal is consumed, with chemicals
using 11 percent, glass 4 percent, the electrical industry 0.3 percent and other industries using around
3 percent. Although the high prices in 2008 did see demand drop sharply in 2009 to 716,000 oz (from
897,000 in 2008 and 1,036,000 oz in 2007), demand has generally recovered since. In 2010, demand
was 887,000 oz, it recovered to 995,000 oz in 2013, before dropping in 2014 and 2015, but is
expected to recover in 2016 to 964,000 oz according to Johnson Matthey, JM.
With the market in oversupply between 2008 and 2012 stocks built up; it swung back into a deficit in
2013 and 2014, but has been in a surplus again in 2015 and is expected to be in one in 2016, this
despite strong auto sales in recent years. With auto sales expected to see slower growth in 2017, the
outlook for demand is not that robust. Tighter emissions control regulations in China and a roll-out of
tighter regulations in the US should lead to higher loadings of Rhodium, which will help offset lower
sales growth, but the outlook for the auto market is generally not bright in 2017.
In other industries, demand from the glass industry is quite cyclical as it comes in waves as and when
new capacity is added. One aspect that should not be overlooked is that with Rhodium prices below
those of Platinum, glass manufacturers can alter the mix of Platinum and Rhodium they use.
Indeed, with Rhodium prices below those of Platinum, weightings of Rhodium in catalytic convertors
may pick up as to various extents all three PGMs can be substituted for one another. With the
Palladium market in a significant supply deficit, while Rhodium has been in a supply surplus in recent
years, it may be that Rhodium prices end up trading at a discount to Palladium too. Given the
Rhodium market is a tenth of the size of the Platinum and Palladium markets, it may not take much of
a shift in market share for Rhodium’s fundamentals to tighten up. Total demand for Rhodium was 0.93
Moz in 2015, compared with 9.26 Moz for Palladium and 8.30 Moz for Platinum.
Investment interest
Investment interest in Rhodium may well pick up if investors start to see prices recover. Whereas
before the launch of the first ETF in June 2011 it was difficult to invest Rhodium, the existence of two
Rhodium ETFs now has changed that. The European ETF holdings have dropped to 60,000 oz, from
around 106,000 oz of Rhodium a year ago, while the South African ETF holds around 44,000 oz.
Supply
Rhodium is mined as a co-product along with Platinum, Palladium and other PGMs, so output cannot
easily be tweaked to match demand, hence after the financial crisis the surplus built up as producers
were unable to regulate Rhodium mine output on its own. Mine output peaked in 2007 at 824,000 oz,
it dropped to 695,000 oz in 2008 when power outages in South Africa hit production (which led to the
jump in prices to $10,000/oz), but rebounded to 765,000 oz in 2011, before slipping to 615,000 oz in
2014, due to the prolonged strike in South Africa, according to Johnson Matthey data. Production in
2015 rebounded to 754,000 oz, and is expected to ease to 743,000 in 2016.
Precious Metals Forecast - PGM December 2016
16
South Africa is the largest producer, supplying around 81 percent of mine supply in recent years and
59 percent of total supply, including supply from recycled material. With new three-year labour
contracts now agreed, output in South Africa should be relatively stable. Russia is the second largest
producer, accounting for 11 percent of mine supply, while Zimbabwe is the third largest producer
providing 5 percent of mine output and North America produces 3 percent. When recycling is taken
into account then recycling is the second largest source after South Africa’s mine supply, being
equivalent to 36 percent of mine supply, while it accounts for 27 percent of total supply.
For 2017, mine supply is expected to edge lower as the pick-up in production from Zimbabwe in 2016,
which included an increase in production due to processing stockpiled ore, is expected to fall back in
line with mine output. But, like the other PGMs, supply from recycled material could pick up if higher
prices entice recyclers to release metal into the market.
Rhodium scrap is mainly collected from recycled autocatalysts and the amount of metal from this
source is likely to increase as the global vehicle population grows, but as thrifting in the amounts of
PGMs going into each unit started in 2005, there may be some reduction in the amount of Rhodium
recovered per unit. Legislation on the recycling of electronic-scrap means more scrap will also be
recycled in the years ahead.
Balance
After 2007 the Rhodium market moved into a supply surplus until 2013 when South African supply
was affected by strikes and safety stoppages, as was the case in 2014 as well. During this time it is
estimated that the surpluses led to the build-up of some 500,000 oz of Rhodium; in 2013 and 2014,
supply deficits led to a drawdown of some 75,000 oz, but with another surplus in 2015 and with one
expected again in 2016, it means stocks remain high. Rhodium supply is estimated to amount to
some 1,026,000 oz in 2016, including recycled material, while demand is forecast at 964,000oz,
giving a supply surplus of 62,000 oz. With potentially the net stock build in recent years now being
some 580,000 oz, including 2016, it is going to take a considerable time before the market becomes
tight again.
Conclusion
The outlook for Rhodium demand is tied in with the global outlook for vehicle sales, so for next year
we would expect a subdued demand outlook. A pick-up in supply from recycling may well mean the
supply surplus grows even bigger in 2017, which would add to the already large stock overhang.
Given the fundamental outlook, it is difficult to see investment interest pick up, unless long term
investors see Rhodium prices as being at rock-bottom. We envisage prices holding in the $600 to
$1,000/oz range in 2017.
Precious Metals Forecast - PGM December 2016
17
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