Investment demand drives the platinum market

Brendan Ryan | Mon, 06 Feb 2012 19:33

[miningmx.com] -- The flow of investment funds into platinum is what has largely been determining the price of the metal over the past decade, and not the traditional supply-and-demand market fundamentals.

That’s the view of Paul Walker – Global Head of Precious Metals for GFMS Thomson Reuters – who described himself to delegates at the Mining Indaba being held in Cape Town as “a lapsed fundamentalist”.

Fundamental analysis of the platinum market looks at statistics such as the supply of newly-mined production of platinum, and how much additional metal becomes available through the recycling of car exhaust systems.

That supply would be offset by consumption from the main users – the automobile industry, jewellery manufacture and various industrial applications – and the reconciliation would establish the state of the market.

Walker commented, “Perceived wisdom is that the platinum price hit an all-time high in 2007 because of a shortage of supply, and that the market has been in deficit since then – except for maybe a small surplus in 2010.

“Yet, the GFMS studies show that the platinum market based on the fundamentals has been in surplus for the last five to six years.

“That should have put pressure on platinum prices but [it] did not, revealing some kind of disconnect between the market fundamentals and what has been driving the price.

“To find the answer to this, you have to look at what has been happening in the investment market. The fact is that the direction of the platinum market is being determined by the willingness of investors to fund that market.”

Walker said the primary factor likely to affect investment demand for platinum in future was the movement in real interest rates.

He commented, “The reason investors are getting into the South African platinum industry has nothing to do with the fundamentals of the business.”

Walker believed this situation would end when investors decided they were no longer prepared to fund the market and, when that happened, it would result in a cut in marginal platinum supply from South Africa.

“I think we are in for a very bumpy ride over the next six to 36 months,” he concluded.

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