2017 PGM Market Outlook

Transcription

1 Page 1 Platinum Group Metals After having fallen from the middle of 2014 through all of 2015, price trends of platinum and palladium diverged over the course of Platinum and palladium both rose in the first eight months of last year. Platinum, however, faced some headwinds after July, mostly from softer fabrication demand and sufficient South African mine supply. In contrast, palladium prices basically rose throughout 2016, albeit in a very volatile fashion with the increase in prices punctuated by four major down-drafts over the course of the year. For platinum, relatively softer fabrication demand and ample South African mine output are likely to continue through Producers ultimately will need to adjust their production levels sharply lower to reflect the new reality of lower fabrication demand, but such adjustments may lie beyond the coming year. The very trends that have made it a tough time for platinum have become tailwinds for palladium. The declining market share of diesel vehicles and technological changes including the popularity of Selective Catalytic Reduction (SCR) and the substitution of palladium for platinum in diesel catalysts all strengthen fabrication demand for palladium. As South African platinum group metals mining declines in the future to accommodate lower demand for platinum, it will squeeze palladium supplies, even as demand for this metal rises. Palladium s relatively healthier fundamentals were reflected in the price of the metal over the past decade. Palladium was a star performer in the precious metals complex in 2016, up more than 21% at the end of the year from the end of Given the industrial nature of the two metals, platinum and palladium prices will continue to reflect fabrication demand from the auto market and other industrial uses of the two metals. Mine production and scrap recovery also will be important factors, with the former already having fallen for most of the past decade in South Africa, the world s top producer. Few people realize that South African PGM output already is off one-fifth from what it was a decade ago. CPM projects that production will fall another 10% or so over the next 10 years, with most of these declines coming after Investment demand, and inventory purchases and sales by producers and users of these metals are expected to play crucial roles in determining the course of prices, as they have over the past several years. The PGM markets have been running surpluses of newly refined platinum and palladium relative to fabrication demand for most of the time since In the early years of this period investors were readily willing to mop up such surpluses, in part because PGM prices were low and fabrication demand, including platinum use in automobiles, was rising at healthy rates. All of that changed after the Global Financial Crisis and Great Recession. By 2011 the PGM markets still were running surpluses of new supply over fabrication demand, but investors were increasingly reluctant to add to their holdings. Some began selling, from 2012 through the first half of In this way the surpluses of metal, and investors willingness or not to absorb those surpluses were key to platinum and palladium prices. Going forward, significant surpluses are projected to remain in the platinum market over the next few years. Palladium surpluses are much smaller and are expected to remain very small during this time. If investors are reluctant to buy large volumes of platinum, this metal s price may remain weak for several years, before rising later as the long period of low prices takes its toll on South African production and encourages increased use of this metal. With tighter markets and stronger fabrication demand, palladium may see stronger prices than platinum in 2017 and beyond. In fact, palladium could move to a premium over platinum at times over the next several years. These tighter fundamentals are not being lost on investors, who may show more interest in palladium than platinum going forward. Platinum Platinum prices are forecast to average $939 on an annual basis during 2017, down from an annual average of $990 in Platinum prices are expected to move mostly sideways with limited downside during the first three quarters of the year. Platinum is not expected to be able to compete with gold, silver and palladium for investors attention. Prices could start to rise at a modest rate during the fourth quarter of the year, on increased investor interest in the metal in anticipation of a slowdown in mine supply growth starting in 2018 and continuing for several years thereafter. In the meantime there could be occasions throughout 2017 when announcements of supply disruptions (be they related to production curtailment or labor issues) and/or financial stress from South African mining companies could help stimulate bouts of investor interest

2 Page 2 in the physical metal, pushing prices higher at any given time. In addition, spillover effects from the price movements of gold, possibly stemming from political and economic uncertainty around the world, also could push platinum prices higher over the course of The adverse fabrication demand trends that are expected to weigh on platinum prices have been in place for the past couple of years and are expected to continue going forward as well. That said, they are nothing new, are well known to platinum investors, and are priced into the metal market. On the supply side, however, the market has overlooked the on-going reductions in South African and world total mine production since Mine production in 2016 was off -20% from 2006 levels. Faced with continued financial and operational issues, South African platinum producers are projecting steady output for Longer term South African production is expected to decline sharply, tightening supplies relative to demand to the point where prices recover to levels at which mining platinum is profitable once again. Platinum fabrication demand from the auto sector, the largest end-use for the metal, has been declining in recent years. There are several reasons for the development of this trend: demand for diesel passenger vehicles in Europe and India has been declining due to environmental concerns; selective reduction catalyst technology, which uses only a fraction of the platinum used by conventional catalysts, has been gaining popularity on dieselpowered commercial vehicles and high-end passenger cars that have platinum-intensive auto catalysts,; and the shift away from platinum toward palladium in conventional diesel catalysts has continued. Europe has been the largest source of demand for diesel passenger vehicles, which use platinum auto catalysts. The positive consumer and government sentiment toward diesel vehicles in the 1990s and 2000s, helped by reduced taxes on diesel fuels imposed by government across Europe, started to reverse in The reason was that problems from engaging diesel fuels, such as increasing levels of nitrogen oxides (NOx) emissions and particulate matter (PM), were starting to outweigh diesel s benefits of emitting relatively lower greenhouse gases over gasoline. To be sure the decline in diesel s market share in the European passenger vehicle market has been gradual to date. In 2015 new diesel car registration accounted for 51.6% of total passenger vehicle registrations. A large part of the reason for this may be that diesel fuel still is cheaper than gasoline, which incentivizes buyers to still opt for diesel vehicles. The trend of declining diesel vehicle market share is expected to continue in Europe in the years ahead. CPM Group does not expect demand for diesel passenger vehicles to fall significantly or in a drastic way, but instead to decline gradually over the next several years to well below 50%. There are several factors including fuel cost and fuel efficiency that presently favor diesel passenger vehicles over gasoline vehicles in Europe. Despite these demand-supportive factors, demand for diesel passenger vehicles in Europe has been declining since 2011 and is likely to decline further in the future. Smaller average engine sizes in automobiles sold in Europe, a trend that has developed rapidly since 2007, also could result in less PGM content per vehicle, limiting demand growth for platinum. Similar to the decline in diesel vehicles market share in the region, this trend is Platinum Prices Comex Platinum Prices, Daily, From 1 January 2000 to 6 January 2017 $/Oz $/Oz 2,400 2,400 2,200 2,200 2,000 2,000 1,800 1,800 1,600 1,600 1,400 1,400 1,200 1,200 1,000 1,

3 Page 3 expected to be gradual and over time, helping hold platinum fabrication demand relatively steady going forward. Other major passenger vehicle markets are primarily gasoline engine markets, using more palladium than platinum. The two largest vehicle markets in the world, the United States and China, have very small diesel vehicle penetration except in large trucks and buses. Only around five percent in the United States and around one percent in China passenger vehicles are diesel. In the United States diesel fuel is more expensive than gasoline, making it a less attractive alternative to a gasoline powered automobile. Furthermore, diesel has never been fully able to shake off its image from earlier decades, in the United States at least, of being a heavy producer of particulates and noise. China s government has long discouraged the use of diesel passenger cars, in part due to deteriorating air quality and in part to secure adequate diesel fuel at reasonable prices to commercial vehicles. Commercial vehicles traditionally have played an important role in demand for platinum. Platinum demand from this sector has been hurt to some extent in recent years because of softness in demand for such vehicles from the large commercial vehicle markets. Such ups and downs are typical of every market and should not be given much consideration when looking at the longer term demand fundamentals of the platinum market. Platinum Supply and Fabrication Demand Annual Platinum Supply Projected Through Russian Supply 8 Secondary Supply Other Mine Production South African Mine Production In the long term, Selective Catalytic Reduction (SCR), which has gained popularity in heavy-duty diesel trucks, could pose a threat to platinum demand from the commercial vehicle sector. There has been an increased emphasis on reducing the level of nitrogen oxide emission as global emission standards get tighter. SCR can reduce nitrogen oxides (NOx) emissions up to 90% while simultaneously reducing HC and CO emissions by 50-90%, and particulate matter (PM) emissions by 30-50%. In compliance with EPA emission standards to reduce PM and NOx to near zero levels, almost all diesel-powered passenger cars and trucks produced in the United States after 1 January 2010 are equipped with SCR. The recent softness in platinum prices, which has put the metal at a discount to gold and at one of its smallest premiums to palladium in history, is expected to benefit demand from other price-sensitive end-use markets, such as jewelry. Higher fabrication costs, which typically are associated with platinum jewelry, are likely to be offset to some extent by the weakness in platinum prices. Additionally, the present discount in platinum prices may make platinum seem like a bargain, as platinum typically trades at a premium to gold, diverting some buyers of gold jewelry toward platinum. It should be noted that platinum use in jewelry is around 2.3 million ounces per year at present. Gold jewelry is around 84.4 million ounces per year, so any meaningful growth in jewelry use of platinum has a relatively minor reductive effect on gold use in jewelry. There also has been a shift away from gold jewelry among younger generations in favor of either lighter karat gold jewelry or platinum jewelry. It is especially true in India thanks to a significant marketing push by the Platinum Guild to promote the use of platinum in jewelry. Demand for platinum jewelry in India has been greatly boosted since 2015, when the price of platinum fell below that of gold and jewelers were still able to sell platinum jewelry to customers at a premium to gold jewelry. Annual Platinum Fabrication Demand Projected Through Other Countries 8.0 Other Uses 7.0 Dental 6.0 Petrochemical 5.0 Electronics 4.0 Jewelry Automotive

4 Page 4 In the medium to long term the decline in platinum prices and the reduced price premium of the metal to palladium are likely to reduce the efforts made by catalysts manufacturers to substitute platinum with palladium. If the price of platinum were to fall below the price of palladium, there in fact could be some substitution away from palladium back toward platinum. Platinum is now substituted one for one with palladium, and therefore if the price of platinum declines below that of palladium in a sustained fashion it could encourage substitution of palladium with platinum. Platinum mine supply is highly concentrated, with around 70% of the total mine supply coming from South Africa. The five-month labor strike in South Africa in 2014 was followed by a sharp rebound in global platinum mine supply during In 2016 global mine supply is estimated to have declined moderately after this sharp rebound in the previous year. In 2017 global platinum mine supply is expected to rise modestly, largely due to strong recoveries in mine production in South Africa and Russia, the world s second largest platinum producer. A successful three-year wage agreement reached in October 2016 between major platinum producers Anglo American Platinum, Impala Platinum and Lonmin, and the labor union, the Association of Mineworkers and Construction Union (AMCU), helped ensure continued mine production, at least in the near term. The ramp-up in Platinum Group Metal Limited s Maseve Mine, which began in 2016, also is expected to offset the reduction in output at older mines due to a lack of capital expenditure. The gradual tightening cycle in the United States could see the U.S. dollar continue to strengthen against other currencies, including the rand; this possible weakness in the rand against the dollar could to some extent ease the upward pressure on cash costs at platinum miners in South Africa and soften the impact of soft metal prices for them. Nonetheless the rand depreciation does not improve the profitability in South African platinum mining industry; rather, it allows high-cost operations to persist longer than they otherwise might have lasted. Ongoing weakness in platinum prices and rising cost pressures eventually will result in a scaling back of output. This should help platinum prices as 2017 progresses, as investors become ever more aware of the likelihood of further declines in South African mine supply. The increase in prices would be from a very low base and insufficient for mining companies to generate the sort of profits they need to attract fresh capital. Platinum secondary supply has been in a generally downward trend since 2011, which has been one positive factor for platinum prices in recent years. The contraction in scrap supply is driven almost entirely by a reduction in this supply from the United States, which used to be one of the largest sources of secondary platinum. The absence of platinum use in auto catalysts in gasoline passenger cars is the main reason for the decline in platinum scrap supply from the United States. In 2017 platinum secondary supply is expected to continue to decline at a moderate rate. Palladium The annual average palladium price is projected to be around $704 in 2017, representing a 14.7% increase from the annual average price of $614 in Prices are forecast to move mostly sideways, with limited downside or upside from current prices initially. The fundamentals for palladium are reasonably positive, with supply closely balanced with fabrication demand. This relative tightness should serve as strong underlying support for palladium prices during On the upside, palladium prices, having risen more than 20% over the course of 2016, may need some fresh bullish catalysts to be able to rise significantly higher. The much-awaited announcement of the extension of the sales tax break to automobiles with smaller engines in China came in late 2016, which helped pull up palladium prices in the last two months of If the U.S. Mint starts to produce palladium coins this year, the scale of the production is likely to be relatively small. This could boost investor interest in palladium in a couple of ways. First, the Mint s introduction of a palladium coin would help draw attention to palladium from investors new to this metal. Second, a limited mintage could lead investors who are unable to secure U.S. Mint palladium coins to turn to other palladium coins and investment bars, further increasing investor demand for palladium. Palladium s strongest fundamental has been fabrication demand, which has benefitted in recent years from the overall growth in the end-use markets where palladium is used extensively. These markets include the gasolinepowered auto markets of the United States and China, as well as the global electronics industry. It also has benefitted from the substitution of platinum with palladium in certain conventional diesel auto catalysts. Palladium fabrication demand is expected to rise during The Chinese auto market is likely to continue to grow strongly in 2017 in response to the partial extension of a sales tax cut offered by Beijing to buyers of new automobiles with 1.6 liter engines or smaller. The sales

5 Page 5 tax will be 7.5% starting 1 January 2017 from the 5% in 2016, but is still below the normal 10%. This sales tax subsidy should benefit auto sales and production in China. It is worth mentioning that the positive impact on palladium demand is likely to be smaller as PGM loadings in auto catalysts are directly proportional to the engine displacement, which means that smaller cars such as those covered in the tax break use less palladium than larger cars. Nonetheless, the sheer size of the market for smaller automobiles in China, boosted by upgrade and replacement and investment demand from a growing middle class, is large enough to outweigh the effect of smaller PGM loadings per vehicle. A faster timeline required by the Chinese government in terms of introducing stricter emission standards also is expected to help increase usage of palladium in auto catalysts there. In response to the heavy smog in the northern part of the country in December 2016, China now requires all light vehicles to meet the China 6 emission standard, which is based on Euro 6 and U.S. Tier-3, starting the middle of 2020, compared to the previous starting date of 1 January All light vehicles are required to meet the China 5 emission standard, which is the equivalent of Euro 5, starting 1 January Meanwhile the U.S. auto market is expected to continue to grow, albeit at a somewhat slower rate, in 2017 after auto sales reached an all-time high in Demand for large pickup trucks and SUVs should provide a strong underlying support to auto sales and production in the United States in Fabrication demand strength from the Chinese auto sector should more than offset any relative softness in the U.S. auto market. Taken together, the rate of growth in palladium fabrication demand from the auto sector is expected to hold up well during 2017, with the total volume still high and rising. Demand for palladium in the electronics industry is expected to rebound during 2017 after going through a slowdown over the past couple of years due to an increase in inventory buildup. As demand for electronic devices continues to thrive, demand for semiconductors that employ palladium is likely to rise as the inventories of unsold products have been worked through. On the supply side the fundamentals are less immediately supportive of prices but longer term positive. Palladium mine supply is not as sensitive to prices because nearly all of the metal produced is a byproduct of platinum, nickel, or copper. As in the case of platinum, there have been no meaningful reductions of mine production announced by major producers such as Norilsk Nickel and South African platinum mining companies in the near term, although South African output has fallen over the past decade already in line with the decline in platinum output since The successful wage negotiations between three major South African platinum producers and the labor unions for the next three years ensure the continuation of mine output at least in the near term. During 2017 much of the supply growth is expected to come from Russia, the world s largest palladium producing country. Russia s mining industry has been hurt by a negative macro background in the past few years as the country s economy contracted, the ruble weakened and inflation rose sharply. Its palladium supply has been in a Palladium Prices Comex Palladium Prices, Daily, From 1 January 2000 to 6 January 2017 $/Oz 1,150 1, $ /Oz 1,150 1,

6 Page 6 generally downward trend since 2008, with the exception of As Russia s economy is expected to emerge from recession in 2017, its palladium supply is likely to rebound from levels seen over the past few years, which will help pull up global palladium mine supply as a whole. Unlike in the case of platinum, secondary supply for palladium has been rising in recent years, partly due to the increase in the amount of palladium being recovered from the U.S. auto market. Additionally there has been an increased flow of palladium from Europe, with diesel auto catalysts containing palladium now entering the scrap yards. Conclusion A possible slowdown in global economic growth and an absence of near-term supply disruptions are likely to keep the price upside of platinum and palladium limited this year. Decent fabrication demand, albeit growing at a slower rate, from the auto sector should serve as a strong underlying price support for the two metals. A breakout of the three-year wage agreement between major South African platinum producers and the labor unions could obviously change all of this, but that is highly unlikely. Palladium has stronger fundamentals that platinum. Both metals ultimately will need to see revived investor demand for prices to rise sharply. This may occur in palladium before it appears in the platinum market. The medium to longer term fundamentals of the two metals meanwhile are healthy. We believe the prices of platinum and palladium have limited downside from present levels, which should allow investors a good entry point to Palladium Supply and Fabrication Demand Annual Palladium Supply Projected Through Other Mine Production 9 8 Secondary Supply Russian Supply South African Mine Production benefit from the healthier future supply and demand fundamentals in these markets. The relatively smaller sizes of the two markets mean that platinum and palladium tend to react to positive or negative news in a volatile manner. PGM investors often try to predict positive price developments, because once events occur prices tend to respond quickly, making it difficult to profit by jumping into long positions at that point. Prices are expected to stabilize in the first part of this year as investors have, for the most part, priced in all of the negative fundamentals for the two metals. Platinum is expected to ultimately benefit from shrinking supplies, a result of a lack of capital expenditure in the mining sector and declining secondary supply. Investors are presently pricing in the less bullish factor from the fabrication demand but are yet to begin to price in the supply-side slowdown that could occur in the medium term. Since South African platinum supply seems likely to fall sharply before auto use declines on a long-term basis, the platinum market is likely to experience a period of several years of tight supply of newly refined metal relative to fabrication demand, which could push platinum prices sharply higher. Such a move may be a few years away, however. Palladium meanwhile is expected to benefit from increased usage of the metal in fabricated products. Demand from the electronics industry is forecast to pick up in 2017 after a lackluster Furthermore demand from the auto sector should continue to benefit from decent global vehicle demand and tighter emission standards globally. Annual Palladium Fabrication Demand Projected Through Other Uses 9.0 Petro Chemical 8.0 Jewelry 7.0 Dental Auto 6.0 Electrical

7 Page 7 Platinum Statistical Position Thousand Ounces Platinum Statistical Position Supply p Mine Production South Africa 4,670 4,680 4,122 4,413 3,090 4,474 4,319 4,458 Russia Zimbabwe Canada United States Other Total 6,163 6,410 5,737 6,066 4,850 6,132 5,987 6,149 % Change Year Ago 2.5% 4.0% -10.5% 5.7% -20.0% 26.4% -2.4% 2.7% Secondary Supply 1,525 1,460 1,330 1,322 1,249 1,247 1,254 1,249 % Change Year Ago 25.0% -4.3% -8.9% -0.6% -5.5% -0.2% 0.6% -0.4% Total Supply 7,688 7,870 7,067 7,387 6,099 7,378 7,241 7,398 % Change Year Ago 6.3% 2.4% -10.2% 4.5% -17.4% 21.0% -1.9% 2.2% Fabrication Demand Auto 3,081 3,173 3,153 3,234 3,123 3,173 3,211 3,196 Jewelry 2,126 2,331 2,502 2,443 2,401 2,346 2,328 2,301 Other 1,545 1,556 1,522 1,542 1,482 1,491 1,483 1,485 Total Demand 6,751 7,060 7,177 7,219 7,007 7,010 7,021 6,982 % Change Year Ago 5.2% 4.6% 1.7% 0.6% -2.9% 0.0% 0.2% -0.6% Net Surplus or Deficit Changes in Market Inventories* Price Per Ounce YTD High $1, $1, $1, $1, $1, $1, $1, $ Low 1, , , , , Average 1, , , , , , % Change Year Ago 32.9% 6.7% -9.8% -4.4% -6.6% -24.1% -5.9% -3.6% *Thousand Troy Ounces; Notes: Excludes transitional economies, except as noted. Secondary production statistics exclude toll-refined material; Prices are settlement prices for the nearby active contract on the New York Mercantile Exchange through 10 January. Changes in market inventories are month-end. *Changes in 1997 market inventories exclude U.S. Industry stocks since the U.S. Bureau of Mines ceased publication of U.S. Industry stock level data in the third quarter of 1997; As of 2006, inventories includes changes in ETF holdings; There may be discrepancies due to rounding; NA -- not available; e -- estimates; p -- projections; Sources: U.S. Bureau of Mines, Statistics Canada, trade sources, CPM Group; 6 January 2017.

8 Page 8 Palladium Statistical Position Thousand Ounces Palladium Statistical Position Supply p Mine Production Russia 2,714 2,638 2,590 2,759 2,585 2,352 2,533 South Africa 2,637 2,376 2,488 1,936 2,677 2,567 2,628 Canada United States Others Total 6,836 6,542 6,743 6,536 7,051 6,746 6,947 % Change Year Ago 4.6% -4.3% 3.1% -3.1% 7.9% -4.3% 3.0% Secondary Supply Total 2,230 2,032 2,414 2,516 2,575 2,561 2,655 % Change Year Ago 6.2% -8.9% 18.8% 4.2% 2.3% -0.5% 3.7% Total Supply 9,066 8,574 9,157 9,052 9,626 9,307 9,602 % Change Year Ago 5.0% -5.4% 6.8% -1.1% 6.3% -3.3% 3.2% Fabrication Demand Electronics 1,207 1,191 1,229 1,246 1,250 1,241 1,257 Automotive 5,035 5,465 5,695 5,921 6,132 6,304 6,430 Dental Other 1,137 1,134 1,134 1,137 1,134 1,127 1,131 Total Demand 8,141 8,546 8,801 9,041 9,242 9,398 9,529 % Change Year Ago 2.8% 5.0% 3.0% 2.7% 2.2% 1.7% 1.4% Net Surplus or Deficit Changes in Market Inventories* Price Per Ounce YTD High $ $ $ $ $ $ $ Low Average % Change Year Ago 38.7% -12.1% 12.7% 10.6% -14.1% 14.0% 35.0% *Thousand Troy Ounces; Notes: Excludes transitional economies, except as noted. Secondary production statistics exclude toll-refined material. Prices are settlement prices for the active nearby contract on the New York Mercantile Exchange through 8 January. Changes in market inventories are month-end. *Changes in 1997 market inventories exclude U.S. Industry stocks since the U.S. Bureau of Mines ceased publication of U.S. Industry stock level data in the third quarter of As of 2006 inventories includes changes in ETF holdings. There may be discrepancies due to rounding. NA -- not available. e -- estimates. p -- projections. Sources: U.S. Bureau of Mines, Statistics Canada, trade sources, CPM Group, 6 January 2017.