Be ready for a rebound in platinum
The platinum price took a heavy beating when the great Tohoku earthquake and subsequent tsunamis struck Japan on 11 March, declining from $1 784 to a low of $1 692 on 16 March. However, it seemed to recover afterwards to reach a high of $1 882 on 2 May, before retreating recently to a current level of $1 754 (as at time of writing).
“The recovery and subsequent decline was more a reflection of cross-rate movements of the US dollar than anything else, as the platinum price in terms of euro has remained in a very narrow range since the end of March,” says Dr Prieur du Plessis, chairman of Plexus Asset Management.
According to Du Plessis, the weakness of the platinum price is more apparent if it is compared to gold. “Since Japan’s twin disasters, platinum’s premium to gold has been in a downtrend, falling by 26,2%, from $366 to $270, as at 13 May 2011’s close,” he says. “In terms of euro the premium fell 18,4%, from €234 to €191.”
But why the massive hit on platinum? According to Du Plessis, the Japanese auto industry was hit particularly hard by the earthquake and tsunami that followed.
“Japan’s production of cars and trucks fell by 535000 units or 57,3% in March compared to March last year. Toyota was scheduled to resume production in the second half of April, but only to 50% of normal production.
If I assume only 50% of cars and trucks were produced in April compared to last year, this will mean a loss of another 313000 vehicles. If production in May returns to 75% of the same month last year, another 180000 vehicles would have been lost compared to last year’s total production of 9,5 million cars and trucks. Those production losses add up to a staggering 1028 million vehicles or nearly 11% of 2010 production!”
According to Du Plessis, the impact of the Kobe disaster in January 1995 was miniscule compared to that of the twin disasters in March. “I estimate the production of only about 40000 units were lost in January that year while production returned to normal in February,” he says.
Japan consumed a gross 535000 ounces of platinum for auto-catalysts in 2010. “It therefore means Japan’s auto industry uses on average 0,054 ounces of platinum per vehicle,” says Du Plessis.
“It therefore transpires that since March platinum demand from the Japanese auto industry alone has dropped by approximately 58000 ounces. That excludes the ripple effect of supply disruptions in other countries such as Malaysia that saw auto production in that country slipping by 24,7% in April,” he says.
“I will not be surprised if the loss of the total demand for platinum in the global auto industry this year could add up to in excess of 100000 ounces or 1,7% of last year’s total supply. While it seems small, the 100000 ounces should be compared to the average investment demand of approximately 55000 ounces (2008–2010),” says Du Plessis. “That is huge!”
Du Plessis is bullish on the longer-term outlook for platinum and says the big question is when the platinum price will start to recover. “I think it is generally accepted the damage to Japan’s economy and infrastructure this time is significantly worse than after the Kobe disaster.”
According to Du Plessis, it is only a question of time before platinum’s premium to gold will be restored. “In 1995 it took approximately 3,5 months after the disaster before the premium started to open up. This time around it may take longer due to the severity of the disaster.”
Regarding the platinum price itself Du Plessis said that in 1995 the platinum price jumped by more than 10% when the market realised the underlying value of the metal compared to other precious metals.
“Will we see it again? Yes, I think so, but it depends on the return to normality of Japan’s vehicle production. At this stage the overhang of approximately 100 000 ounces of platinum will certainly delay any major sustainable rallies in the platinum price until the third quarter of this year. In the meantime the platinum price in US dollars will continue to reflect cross-rate movements of the US dollar,” says Du Plessis.
Will he be buying platinum? “Yes, I will add platinum to my long-term holdings,” Du Plessis concluded.
