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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.

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.

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.

Analys

Brent prices slip on USD surge despite tight inventory conditions

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SEB - analysbrev på råvaror

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

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

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

Oil inventories
Oil inventories
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Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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SEB - analysbrev på råvaror

Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Analys

Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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SEB - analysbrev på råvaror

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

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

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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