First Market Surplus for Seven Years Could See Platinum Price Soften Before 2005 Purchasing Comeback

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). The Chinese jewelry market continues to be the main force pushing and pulling the price margins of platinum and palladium, with auto catalyst use of the metals still providing a sheet anchor. Automotive demand for platinum in Europe is experiencing good growth as more diesel-powered cars are manufactured accompanied by tighter regulations on vehicle emissions.

Commenting on the contents of the latest bi-annual platinum group metals (PGM) report, just released by Johnson Matthey (JM)(London, U.K.), the company's divisional General Manager for PGM market development, Jeremy Coombes said in Johannesburg that platinum is expected to move into a market surplus situation for the first time in seven years, which will result from increased production by South African mining companies and the decline in demand for platinum jewelry in China.

The increase in production/supply in 2004 has been led by Anglo Platinum (Johannesburg, South Africa), with Impala Platinum (Johannesburg, South Africa) maintaining its 2003 levels. Lonmin (Johannesburg, South Africa) and Aquarius Platinum (NYSE:AQP ) (Perth, Australia) are both boosting output, while Northam (Johannesburg, South Africa) will see reduced output after a fire suspended operations. Russian output is expected to fall and North American output will rise. The rate of production expansion in Zimbabwe will slow this year. South Africa was the source of about 80% of world production. Auto catalysts took about 44% in demand by application with jewelry taking about 33%. For related news item see May 12, 2004 - Platinum -Palladium Survey Sees Convergence of Application and Price in Auto Catalyst Industry.

JM expects total platinum demand to increase in 2004 by less than 1% to 1.6 tons to 201.3 tons. The market deficit for the metal in 2004 is expected to be only 1.3 tons. The company forecast that platinum would trade in a $760 to $880 range, over the next six months.

Speaking in Tokyo, Dr. Mike Steel, JM's director of market research and planning, said that the spike in the platinum price in mid-April made the metal cost prohibitive for many Chinese jeweler makers. "The spot price is up, but the retail jewelry price in China has remained static and this has really narrowed profit margins for jewelers there," he said. He added that many jewelers had to turn to white gold and other platinum alternatives that are cheaper and offer better opportunities to profit.

JM is forecasting a 10% drop in over all jewelry demand in 2004 to 2.2 million ounces. This drop by 240,000 ounces would mark the lowest level for the sector since 1997. Chinese demand is expected to drop by 20% to 960,000 ounces. This will be the first time this market has dropped below the 1 million ounce level since 1999.

Turning to the less expensive palladium Chinese inventories are expected to have ballooned from 25,000 ounces to 510,000 ounces in 2004. But although global palladium jewelry demand grew from 250,000 ounces to 740,000 ounces in 2003 the metal has not been a great success in China. "The response has not been wildly enthusiastic. All of the reasons that you would choose platinum over palladium have become apparent. Palladium cannot match platinum's luster, it is not good for setting jewels," said Steel. For related news item see May 14, 2004 - Mining and Inventory Increase Needed to Balance Demand in Platinum-Palladium Markets.

JM estimates that palladium demand could rise by 22.7 tons, to 191 tons, in 2004, but the market will be left with a big surplus of 31.7 tons, as supply will rise to 222.7 tons. As the surplus is expected to carry over to 2005, JM forecasts palladium trading in the range $160 to $250 in the next six months. With the softening price of platinum purchases of the metal could come back in 2005.

Coombes noted that there has been a new trend with U.S. investors who have been buying one-ounce palladium bars. He said that 150,000 ounces would have been sold in this format in 2004.

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