Platinum Poised to Soar Based Upon Simple Supply and Demand

By: John Manfreda

Platinum was always one of our late co-founder's favorite metals. Glen appreciated the strong supply and demand fundamentals associated with platinum. And, right now, the pressures from both the supply and the demand side of the equation point clearly to higher prices.

Demand for platinum is based on the factors of industrial use, jewelry demand, and by the demand for alternative investing in precious metals that drives gold, silver, platinum and palladium.

Supply is driven almost entirely by mining in South Africa, with their unique labor problems and economic issues.

What a Difference a Year Makes

The 2013 price performance for platinum was weaker than expected. But that was largely due to the weakness in gold, which affected all four of the precious metals. At the start of 2014, we witnessed a noticeable uptick in platinum prices, as precious metals' prices rose in the first six weeks of this year. Platinum benefited as well.

For the remainder of the year, we foresee a slow rise as supply diminishes and demand increases. The factors driving the increase are very practical, lower supply from a single dominant source and higher demand from a single dominant buyer. Certain subtle factors will dictate when and how steady price movements will be.

DOMINANT FACTORS

South Africa continues to drive platinum supply in 2014. Automobile catalytic converters drive demand.

Just examine the totals on the following chart to see that the supply and demand pressures on the platinum market are each driven by a single dominant factor.

1. On the supply side, that factor is South Africa, which accounts for the lion's share of the world's supply. Nearly 75% of mined platinum (which discounts scrap recovery) is extracted from South African mines, with Russia a distant second, producing barely 1/6th of the South African total.

2. On the demand side, the industrial uses of platinum, especially in the manufacture of automobile catalytic converters, are paramount. Automobile catalytic converters account for 37% of the demand for platinum.

The 'Deficit Market' chart shows platinum currently in a deficit, with demand outstripping supply on a consistent basis until a catch-up in 2015.

Unsustainable mining costs in South Africa mean its mines are unlikely to deliver more platinum in the foreseeable future.

With platinum selling for around $1,400 per ounce, South African mines don't even cover costs of operations, and operational costs represent only a part of the total cost of mining platinum.

The unmet need for capital to pay loan interest, construction and exploration costs, paint a troubling picture. Many mining companies see mine continuation, and certainly expansion, as unprofitable.

Add to this labor strikes which continue to pose problems for South African producers, and you have the recipe for closing mines and a resultant reduction of supply.

Earlier this year, more than 70,000 workers launched a strike at the world's three-biggest platinum producers.

The strike forced the closing of mining operations, which produce more than half of the world's platinum. Workers are demanding a doubling of their wages, but the companies insist that demand is "unaffordable and unrealistic."

This persistent labor unrest is making it increasingly difficult to secure financing from investors. Rising electricity prices, because of a strained power supply, have added to the miners' woes.

This cost curve graph from Johnson Matthey paints a vivid picture of the unsustainable platinum production at the $1,400 per ounce price level, forcing mines to close their doors.

"There's no doubt that miners are struggling in South Africa," said Jeremy Coombes of Johnson Matthey. He estimated that, including capital expenditure costs, about half of South African and Zimbabwean mining output does not break even for their parent companies.

The Scrap Factor: Recycling of Platinum could relieve some supply pressure.

With scrap platinum accounting for just under a third of the total supply, platinum analysts site an increase in the number of vehicles being scrapped, leading to recycling of platinum.

The scrap comes from spent catalytic converters, a byproduct of the aging U.S. car fleet and the trading in of old cars. Catalytic converters are recycled and entered into the market to create a secondary supply. This provides some supply relief, although it doesn't completely substitute the supply growth constrained by South African labor issues.

Nor is it a permanent or reliable supply.

Environmental legislation adds to demand.

New emissions rules in Europe take effect in September 2014 and into 2015. These environmentally friendly mandates significantly raise the amount of platinum required in automobile anti-emission equipment. These rules are expected to affect Europe's diesel-fired vehicles which tend to use more platinum than palladium. Palladium is more common in the emission-control equipment of gasoline engines.

Bart Melek, head of commodity strategy with TD Securities, says:

"We think that auto-catalyst demand should strengthen in 2014, as production and consumption in Europe pick up. It hasn't been pretty in Europe....[But] even if we get a small positive next year, that would be very, very material [for platinum]".

Chinese demand is a major factor in 2014.

China is becoming more environmentally conscious as well and is looking to increase the use of catalytic converters. New 2014 diesel emission standards are being introduced in China that will significantly increase the use of platinum in diesel catalysts.

Chinese platinum demand in 2013 split evenly between industrial uses and jewelry. Jewelry usually accounts for a majority of Chinese demand, but China is increasingly seeking platinum for industrial uses.

An increase in platinum is slated for Chinese consumer goods, like computers, tablets and plastics, as the country shifts slowly from an export-led economy to one driven by domestic consumption.

What to do now.

In the face of falling supply and rising demand, now appears to be the right time to take a position in platinum.

ASI has a myriad of platinum alternatives for you.

• 2014 1-ounce Platinum Eagles are now available.
• You can also purchase the Platinum Canadian Maple Leaf.
• One and ten ounce platinum bars.
• Perth Mint Certificates, with the added convenience and protection of offshore storage backed by the government of Western Australia, insured by Lloyd's of London.
• ASI Precious Metals Direct (ASIPMD). Choose from coins or bars for domestic or overseas storage.

For any of these options, call your ASI Preferred Client Relations representative at 877-340-2250 to discuss which might serve you best.

For ASI Precious Metals Direct, visit our website at www.asipmdirect.com and open an online relationship in less than ten minutes in your name, a joint name, trust, corporate or Universal Transfer to Miners Account (UTMA) for a child. Storage is available in New York City, Salt Lake City, Singapore and Zurich, making ASI PMD a great way to internationalize your portfolio.

The platinum markets in 2014 will be governed by diminishing supply from South Africa as mines close and labor continues to disrupt. This will only be temporarily offset by an increase in recycled platinum.

As a result, platinum deficits are likely to continue as demand in Europe and China increases due to environmental requirements for diesel and gasoline automobiles.

The dynamics of the market are becoming very exciting. Call us at 877-340-2250 to discuss.

Don't delay. Your Preferred Client Relations representative will listen to your goals, explain your alternatives and guide you toward a decision that protects your portfolio across currencies, across countries and across asset classes. Consider platinum to help you Keep What's Yours!