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Extremely tight platinum and palladium markets

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Commerzbank commodities research

Commerzbank commoditiesThe South African platinum mining industry has been affected by strikes for more than ten weeks now. Because stocks are dwindling, the mining companies concerned are finding it increasingly difficult to fulfil their contractual delivery obligations. The situation as regards palladium is dominated by concerns about how Russia might react if the West were to impose further-reaching sanctions on the country. At the same time, demand on both markets is robust, driven by the automotive industry. The situation appears to be tightening noticeably, which in our opinion suggests that platinum and palladium prices will rise.

Commerzbank forecasts 2014Platinum came under pressure from the weak gold price in March and declined noticeably as a result. For a time it dropped below the $1,400 per troy ounce mark to a six-week low. Palladium fared somewhat better and trended sideways while fluctuating significantly. For the first time since August 2011, it actually exceeded the $800 per troy ounce mark for a while, though it was unable to maintain this level (Chart 1). We believe that both precious metal prices are too low from a fundamental viewpoint given the risks to supply. In this Commodity Spotlight we will be assessing the supply situation in South Africa, the world’s biggest platinum producer and the world’s number two palladium producer, as well as taking a look at Russia, the biggest supplier of palladium.

Platinum price

According to figures from Johnson Matthey, South Africa produced 4.12 million ounces of platinum and 2.35 million ounces of palladium last year, thus accounting for 72% of global platinum mining production and 37% of global palladium mining production (Chart 2). Palladium is generally mined together with platinum. However, a strike has been underway in the South African platinum mining industry since 23 January. The radical AMCU (Association of Mineworkers and Construction Union) called its members out on strike to lend emphasis to its calls for wage hikes. The union, which was established in 1998 and formally registered in 2001, represents the majority of workers in the platinum mining industry and has meanwhile overtaken the more moderate union NUM (National Union of Mineworkers) in terms of membership. The world’s three biggest platinum producers are affected: Anglo American Platinum, Impala Platinum and Lonmin, 87% of whose workers are union members. Accounting for 66% of these, the AMCU predominates (Chart 3). Over 70,000 workers went out on strike when called upon to do so. The strike is the biggest to hit the South African mining sector since the Apartheid regime ended in 1994. 350,000 workers took to the streets in 1987 to protest for better working conditions, though this strike was brought to an end after around three weeks and cost the mining companies around ZAR 250 million at the time, according to the NUM.

AMCU and platinum

Union and companies still far apart

The AMCU is calling for producers to increase wages significantly, its core demand being that entry-level salaries be doubled to ZAR 12,500 per month. Originally, the AMCU urged the mining companies to meet its demands immediately, though it has meanwhile shown itself willing to “make some concessions”. AMCU has “eased” its core demand in two stages, with the result that it now wishes to see wages doubled within four years. For their part, the companies have offered staggered wage increases over the course of three years – 9% in the first year, 8% in the second and 7.5% in the third. In February, the rate of inflation in South Africa was 5.9%. In other words, the two parties still maintain positions that are very far apart. To date, the state mediator engaged to help (CCMA – Commission for Conciliation, Mediation and Arbitration) has failed to bring the two parties any closer together. In fact, talks were actually suspended for a time because the mediator saw no possibility of agreement.

Politicians exercise restraint ahead of elections

So far, politicians have chosen not to intervene in the strike, clearly because of the upcoming elections in South Africa. Parliamentary elections will be held on 7 May, with presidential elections to follow in the second half of the year. The mine workers make up a major group of voters which neither the governing party ANC (African National Congress) nor the opposition parties wish to alienate. Polls indicate that the ANC is likely to win the elections, though it remains to be seen whether this will subsequently result in the necessary reforms being implemented which would also steer the mining industry into calmer waters. Recently, the South African finance minister played down the strike’s negative impact on the local economy, claiming that the current strike is causing less damage than the industrial actions taken two years ago. In 2012, a series of strikes cost gold and platinum producers more than ZAR 16 billion.

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High revenue losses for companies and lost earnings for workers

By their own account, the mining companies concerned are losing 9,900 ounces of platinum production every day – 4,000 ounces at Anglo American Platinum, 2,800 ounces at Impala Platinum and 3,100 ounces at Lonmin. Assuming that work generally continues in the mines seven days a week, the producers have thus lost nearly 700,000 ounces of production since the beginning of the strike. The companies claim that they have lost revenues totalling over ZAR 11 billion as a result. So far, workers who are not being paid while they are out on strike have lost earnings of around ZAR 5 billion.

Company stocks dwindling

Although production has been at a standstill since the beginning of the strike, the companies have been able at least partly to fulfil their delivery obligations by drawing on stocks. By their own account, the producers had piled up considerable stocks in the run-up to the strike, which industrial sources estimated would last two months. The situation is not the same in all the companies, however. Anglo American Platinum had for example announced at the end of March that it had used up half of its 430,000 ounces of stocks up to that point, saying that material would be bought on the market if stocks ran out. By contrast, Impala Platinum had already declared “force majeure” in early March and has no longer been able to guarantee deliveries since the beginning of April. Impala is likewise considering buying in material on the market in order to meet its contractual obligations. Lonmin had also downwardly revised its sales forecasts for this year at an early stage.

Negative long-term impact cannot be excluded

Even if the strike can be brought to an end, it will take weeks if not months before platinum production achieves its pre-strike levels again. After all, the damage in shafts and galleries resulting from the lack of use first has to be identified and, most importantly of all, safety has to be restored. In some cases the companies are already talking about irreparable damage and are considering shutting down individual shafts entirely. There are also likely to be some redundancies because the companies claim that they will otherwise no longer be able to operate at a profit. This could spark renewed protests and set in motion a vicious circle which would harm the entire country.

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Concers about supply outages in Russia

As far as palladium is concerned, we need to take a look at Russia. According to data from Johnson Matthey, Russia accounted for 42% of worldwide palladium supply in 2013 (primary production and reserve sales together totalling 2.7 million ounces) and for 14% of global platinum production (780,000 ounces), making the country the largest producer of palladium and the second-largest producer of platinum. The situation here is dominated by concerns about the extent to which possible sanctions imposed by the West on Russia could hit this sector and how Russia might react to further-reaching sanctions against its economy. That said, there are no signs so far that deliveries from Russia are at risk. According to the UK’s Financial Times, however, Norilsk Nickel, the world’s largest palladium producer, is currently negotiating longterm palladium and platinum supply contracts with Chinese and Japanese buyers. Although this might not mean anything, it could perhaps be viewed as a not particularly subtle hint to the West.

Robust demand from the automotive industry

Automotive industry drives demand for platinum and palladiumDriven by the automotive industry, demand for both platinum and palladium is robust. March saw the seasonally adjusted annualized vehicle sales rate in the US rise to 16.33 million units, the highest figure since May 2007. At 3.16 million units, car sales in China in January and February combined were a good 11% up on the same period last year. It would therefore seem that the 2014 target of an increase in sales of up to 10%, set by the China Association of Automobile Manufacturers, is achievable. The European auto industry may also have bottomed out, for car sales in February increased year-on-year for the sixth consecutive month (Chart 4).

New palladium ETF on the market

New palladium ETF could generate growing investment demandWhen it comes to investment demand, market participants evidently switched their allegiance from palladium to platinum in the first quarter. While the palladium ETFs tracked by Bloomberg recorded outflows of 51,900 ounces, the platinum ETFs saw inflows of 53,600 ounces. That said, the trend could soon be reversed in the case of palladium (Chart 5), for South African investment bank Absa Capital launched its long-awaited palladium ETF at the end of March. The ETF is listed on the Johannesburg Stock Exchange and solely sourced with palladium from South Africa. If the palladium ETF follows the same course as Absa Capital’s platinum ETF, which was launched at the end of April 2013, a great deal of supply could be stripped from the market. Within just four months of its launch, the platinum ETF became the world’s biggest platinum ETF and at the end of March had a market share of 37% with over 952,000 ounces. Holdings in all platinum ETFs combined are equivalent to more than five months of global mining production, while holdings in palladium ETFs equate to nearly four months of global production.

Higher prices expected during the course of the year

In our opinion, risks to supply in conjunction with robust demand point to higher platinum and palladium prices. According to data from Johnson Matthey, the supply-demand situation was already tight on both markets last year, the global platinum market showing a supply deficit of 605,000 ounces in 2013 and demand outstripping supply on the global palladium market by 740,000 ounces. Assuming the supply problems are not resolved in the near future and demand remains robust, the situation on both markets will doubtless tighten further. By year’s end we continue to envisage a platinum price of $1,600 per troy ounce, while palladium is likely to be trading at $825 per troy ounce.

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Analys

Crude oil comment: Lack of clear direction

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SEB - analysbrev på råvaror

This week, Brent crude prices have declined by USD 2.3 per barrel (2.8%) since Monday’s opening, driven by fundamental market factors. The current price is near its weekly low at USD 81.8 per barrel, down from Monday’s high of USD 84.5 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

The price has fallen by nearly USD 1 per barrel since yesterday afternoon. This week’s downward trend can be attributed to three main factors:

1. Upcoming OPEC+ Meeting:

OPEC+ is scheduled to meet on June 1st for the Joint Ministerial Monitoring Committee (JMMC). Initially planned as a physical meeting in Vienna, it will now be fully digital, suggesting no major discussions or changes. We anticipate that the meeting will result in the extension of current production cuts into Q3 2024. OPEC+ aims to signal a tight yet well-supplied market, maintaining the status quo and minimizing significant market reactions.

2. U.S. Inventory Report:

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Wednesday’s U.S. inventory report had a bearish impact on the market, showing a build in commercial crude inventories (excl. SPR) by 1.8 million barrels, contrary to the expected 1.9-million-barrel draw. This was slightly more bullish than the American Petroleum Institute (API) forecast of a 2.5-million-barrel increase released on Tuesday.

Commercial crude inventories now stand at 458.8 million barrels, about 3% below the five-year average for this time of year. This build is counter-seasonal, as we usually see a draw at this time of the year. Gasoline inventories decreased by 0.9 million barrels, less than the anticipated draw of 1.2 million barrels. Distillate (diesel) inventories increased by 0.4 million barrels, against a consensus expectation of a 0.3-million-barrel draw, further defying typical seasonal trends and adding a bearish tone to the market, even though they remain about 7% below the five-year average. Overall, total inventories (crude + gasoline + distillate) rose by 1.3 million barrels.

Additionally, U.S. crude oil refinery inputs averaged 16.5 million barrels per day last week, an increase of 227 thousand barrels per day from the previous week. Refineries operated at 91.7% of their operable capacity, the highest since mid-January, as they ramp up following maintenance. Gasoline production averaged 10 million barrels per day, while distillate fuel production averaged 5.1 million barrels per day. A marginal improvement in refinery margins indicates healthier demand prospects leading into the driving season.

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3. FOMC Minutes and Economic Concerns:

The continued decline in oil prices can also be attributed to bearish pressure from hawkish Federal Open Market Committee (FOMC) minutes, which raised concerns about persistent inflation. This could result in prolonged higher U.S. interest rates, potentially limiting future oil demand growth.

In summary, the combined effect of the upcoming OPEC+ meeting, the U.S. inventory report, and economic concerns highlighted in the FOMC minutes has contributed to the weakening of Brent crude prices this week.

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Analys

German solar power prices are collapsing as market hits solar saturation

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SEB - analysbrev på råvaror

German solar power producers got a price haircut of 87% over the past 10 days. German solar power producers have over the past 10 days received a volume weighted power price of only EUR 9.1/MWh. The average power price during non-solar-power-hours was in comparison EUR 70.6/MWh. Solar power producers thus got an 87% cut in the power price they get when they produce vs. the power price during non-solar-power-hours. This is what happens to power prices when the volume of unregulated power becomes equally big or bigger than demand: Prices collapse when unregulated power produces the most.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Massive growth in solar power installations in Germany in 2023 is leading to destruction of solar hour prices and solar profitability. Germany installed a record 14,280 MW of solar power capacity According to ’PV Magazine International’. That is close to twice as much as in 2022. Total installed solar capacity reached 81.7 GW at the end of 2023 according to ’Renewables Now’. Average German demand load was in comparison 52.2 GW. So total solar capacity reached almost 30 GW above average demand. Solar power produces the most during summer when demand is lower. The overshoot is thus much larger than the 30 GW mentioned when it matters.

The collapse in solar-hour-power-prices implies a collapse in solar power producer earnings unless the earnings of the installations are secured with subsidies or by PPAs. It also means that there is a sharp reduction in the earnings potential for new solar power projects. The exponential growth in new installations of solar capacity we have seen to date is likely to come to an abrupt halt. There is however most likely still a large range of solar power projects under construction in Germany which will be finalized before growth in new capacity comes to a halt. The problem of solar power production curbs (you are not allowed to produce at all) and solar power price destruction is likely to escalate yet higher before new growth in supply comes to a halt. 

Focus will now shift from solar production capacity growth to grid improvements, batteries and adaptive demand. All consumers are of course happy for cheap power as long as they are able to consume it when it is cheap. At the moment they can’t. But the incentive to be inventive is now super high. The focus will now likely shift from solar power production growth to grids, batteries, adaptive demand and all possible ways to utilize ”free power”. This will over time exhaust the availability of ”free power” and drive solar-hour-power-prices back up. This again will then eventually open for renewed growth in solar power capacity growth.

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It is probably much worse down in the grid. What is worth noting is that these numbers are for all of Germany average. Solar power congestion is much worse in the local grids all around Germany along with local grid capacity constraints ect.

The problem of solar power is high concentration of production: 80% of German solar production was produced during 22.3% of the hours in the year in 2023. What is also worth mentioning is that solar power production is extremely concentrated in relatively few hours per year. It produces in the middle of the day and during summer. In 2023 German solar power produced 80% of its production in only 22.3% of the hours of the year. This basically implies that once solar power production reaches 22.3% of total power supply (without batteries), then solar-hour-power-prices will likely collapse. Solar power production reached 55 TWh in 2023. That’s a lot but it is still only 12% of total demand of 458 TWh in 2023. What it means is that the acute problem of solar-hour-power-price-destruction sets in much before the ”theoretical 22.3%” mentioned above.

On the 21 Feb 2024 we wrote the following note on this issue: ”The self-destructive force of unregulated solar power” where we highlighted these issues and warned that this will likely be a process of ”First gradually. Then suddenly”.

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German solar power capacity makes a big leap upwards in 2023 as the energy crisis hurt everybody. Demand went down. Now there is a large overcapacity in installed solar effect vs. demand load.

German solar power capacity makes a big leap upwards in 2023 as the energy crisis hurt everybody. Demand went down. Now there is a large overcapacity in installed solar effect vs. demand load.
Source: SEB calculations and graph, PV Magazine, Wikipedia, Blberg data on German power demand

German solar power producers got an 87% price haircut on average during last 10 days vs. those who produced during non-solar-power hours.

German solar power producers got an 87% price haircut on average during last 10 days vs. those who produced during non-solar-power hours.
Source: SEB calculations and graph, data by Blbrg

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.
Source:  SEB calculations and graph, data by Blbrg

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.

Volume weighted solar power prices vs. non-solar-hours. Bigger and bigger discount.
Source: SEB calculations and graph, data by Blbrg

Solar power production and German power prices over the past 10 days.

Solar power production and German power prices over the past 10 days.
Source: SEB calculations and graph, data by Blbrg

Solar power production and German power prices on 27 April 2024.

Solar power production and German power prices on 27 April 2024.
Source:  SEB calculations and graph, data by Blbrg
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Analys

Firm at $85

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SEB - analysbrev på råvaror

This week, Brent Crude prices have strengthened by USD 1.2 per barrel since Monday’s opening. While macroeconomic concerns persist, market reactions have been subdued, with price fluctuations primarily driven by fundamental factors. Currently, the oil price stands at its weekly high of USD 84.4 per barrel, with Wednesday’s low recorded at USD 81.7 per barrel, indicating relatively normal price movements throughout the week.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

The upward trajectory since Wednesday afternoon can be attributed to two main factors:

Firstly, Wednesday’s US inventory report, though mixed, conveyed a bullish sentiment to the market due to an overall decline in commercial inventories. The report from the US Department of Energy (DOE) revealed a draw in US crude inventories of 1.4 million barrels last week, surpassing consensus estimates of a 2.0-million-barrel draw –  the American Petroleum Institute’s (API) forecast of a 0.5-million-barrel build on Tuesday.

Additionally, a marginal improvement in refinery margins hints at healthier demand prospects leading up to the driving season. While commercial crude oil inventories (excluding Strategic Petroleum Reserve) decreased, standing approximately 3% below the five-year average for this period, total gasoline inventories saw a notable increase of 0.9 million barrels compared to the consensus forecast of a decrease of 1.1 million barrels. Distillate fuel inventories experienced a more moderate increase in line with expectations, rising by 0.6 million barrels but remaining approximately 7% below the five-year average. Overall, total inventories (crude + gasoline + distillate) showed a marginal increase of 0.1 million barrels, coupled with a 1% improvement in refinery utilization to 88.5% last week (see pages 11 and 18 attached).

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The substantial draw in commercial crude inventories, particularly compared to the typical seasonal build, has emerged as a key price driver (see page 12 attached).

Secondly, the third consecutive day of oil price gains can be attributed to renewed optimism regarding US rate cuts, supported by positive US jobs data suggesting potential Federal Reserve rate cuts this year. This optimism has boosted risk assets and weakened the dollar, rendering commodities more appealing to buyers.

In a broader context, crude oil prices have been moderating since early last month amidst easing tensions in the Middle East. Attention is also focused on OPEC+, with Russia, a key member, exceeding production targets ahead of the cartel’s upcoming meeting. Expectations are widespread for an extension of output cuts during the next meeting.

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Conversely, providing support to global crude prices is the Biden administration’s intention to increase the price ceiling for refilling US strategic petroleum reserves to as much as USD 79.99 per barrel.

With geopolitical tensions relatively subdued, but lingering, the market remains vigilant in analyzing data and fundamentals. Our outlook for oil prices at USD 85 per barrel for 2024 remains firm and attainable for the foreseeable future.

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