One Million Ounces of Platinum Nowhere to Be Found

A supply deficit equal to 13% of annual demand has strangely not yet been reflected in the platinum price. For now!

The physical platinum market may close 2023 with a supply shortfall of 1.07 million ounces (33.28 tonnes), owing to demand growth of approximately 20% this year against stagnant supply, according to the World Platinum Investment Council (WPIC) Q3 2023 report.

The WPIC report published yesterday forecasts a further deficit for platinum in 2024, albeit a significantly smaller one of just 353,000 ounces (10.98 tonnes), though this expectation could easily be overridden by the South African mine closures that have been semi-officially floated.

Platinum supply in 2022 and projected supply for 2023 and 2024

Compared with 2022, the WPIC expects platinum supply to decline this year due to lower recycling rates, and to stagnate in 2024.

Is the Price Bomb Already Ticking?

The reason all of this has not yet triggered a platinum price explosion, according to the WPIC, is that during 2020 and 2021, despite Covid lockdowns and semiconductor shortages disrupting vehicle production, automakers accumulated substantial stockpiles of close to one million ounces of platinum for use in catalytic converters, through physical deliveries under previously agreed platinum purchase contracts and forward contracts.

Those stockpiles were then largely drawn down this year as production ramped up towards the end of 2022 — and, in my modest assessment, the automakers, probably envisioning a recession and therefore declining vehicle demand, may have "forgotten" to renew the hedging contracts that would have replenished their inventories.

The platinum accumulation during the Covid-era production difficulties was also driven by the fact that palladium — which automakers began using increasingly in place of platinum following the 2015 diesel emissions scandal — was trading at more than double the price of platinum during that period.

Major automakers were therefore able to gradually wind down their higher-value palladium inventories and build up platinum stocks "cheaply" through a kind of self-created CFD, which they then conveniently ran down this year, placing downward pressure on the price of both precious metals.

While congratulating the treasury teams at the Volkswagen Group and their peers on what were presumably substantial bonuses, I and several other analysts share the view that we may have already seen the floor in platinum group metals (PGMs): the dollar price of platinum per ounce has fallen 14% since the start of the year, while palladium has fallen more than 40%.

Looking at the longer-term palladium chart, the price decline is quite dramatic: the precious metal, which rallied strongly in recent years, is now trading below its price level of five years ago.

It is perhaps worth noting here that Hungarian savers may have experienced an even steeper decline in price terms due to the relatively strong forint, meaning they can enter a platinum or palladium investment hoping for a higher long-term return in forint terms.

Will the Platinum Story Be Even More Dramatic Than the OpenAI Saga?

I had the privilege of attending the LBMA (London Bullion Market Association) and LPPM (London Platinum and Palladium Market) Global Precious Metals Conference in October this year, where a senior representative of one of the largest South African mining companies indicated to industry participants that at current price levels it is no longer profitable for them to extract PGM metals, and that significant mine closures are planned — and the production hiatus could be prolonged further by tightening ESG requirements.

South Africa, which accounts for roughly two-thirds to three-quarters of the world's annual platinum production (and is the last letter of BRICS), sources the energy required for mining from coal-fired power stations, giving it a significantly larger ecological footprint than "green" mines in Western countries that, after long and costly investment programmes, have already transitioned to renewable energy mixes — though the ESG-compatible countries produce only a fraction of South Africa's platinum output.

Furthermore, platinum mined by Russia — a distant but still second-largest producer — can only reach Western automakers via circuitous routes through China or India due to US and EU sanctions. In the event of South African platinum and palladium mine closures, a shortfall many times larger than projected in the report could therefore emerge in my view, particularly if Russian mining companies were simultaneously to withhold their extracted platinum for "friendly" Chinese automakers.

A further signal of serious market turbulence is that Coronation Asset Management, one of the largest investors in South African mining companies, completely exited PGM mining stocks from its portfolio. The logic is entirely understandable: even if the platinum price were to rise as production falls away, mines cannot benefit materially from higher prices if they remain closed in the interim.

Starting from these dynamics, a scenario could emerge in which physically existing platinum — available, for example, in the form of Good Delivery bars held in bonded warehouses — could trade at a substantial premium to the exchange price for an extended period, though it is equally conceivable that this situation would persist for just a few days or even only a few hours.

Interested in the Secrets of the Precious Metals Market?

Kristóf will open the 1st Budapest Precious Metals Conference with his presentation on 30 November 2023 at the Bank Center — and you are warmly invited, whether in person or online.

At the conference you can meet the management of Conclude Zrt., which operates Goldtresor, and learn genuine inside insights into the precious metals market from speakers arriving from around the world.

At the closing roundtable discussion, you will have access to exclusive information about the future of gold and other precious metals — not available anywhere else!

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