Commodity Insights Bulletin - Platinum Q2, 2016 - Q3, 2016

Commodity Bulletin - Platinum Q2, 2016 - Q3, 2016

There is a tight relationship between the uncertainties related to global economy growth and the outlook for platinum. The disrupters in the global economy fueled by global political uncertainty is making it very difficult for the platinum mining industry to make strategic decisions.

Oil & Gas Lead, and Commodity Lead, Platinum

KPMG in South Africa

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Overview

Some platinum mining executives are increasingly bullish that this is the bottom of the commodity cycle and are focusing on making the best of the current difficult situation, specifically focusing on the allocating of capital to preserve cash flow and earnings. On the positive side, a three year wage agreement was negotiated in October 2016 in South Africa, without any strikes or significant disruptions to production.

Overall, we expect to see less volatility in next three years with gradual price increases, the long term platinum price is very uncertain given global economy outlook.

Price outlook

After a drastic decline in the second half of 2015, platinum and palladium prices have significantly rebounded during Q2 and Q3 2016. This rise in commodity prices was driven by strong growth in speculative and investor demand, which was reinforced by a tighter mine output.

Prices of platinum increased 19 percent y-o-y in the six months ending September 2016 and those for palladium by 29 percent y-o-y. These precious group metals (PGMs) benefitted from stronger autocatalyst demand, accounting for about 40 percent of platinum and 75 percent of palladium demand during Q2 2016, which offset weaker speculative and investor sentiment.

Palladium prices are expected to decline further by 15 percent y-o-y to US$696.6 in 2017 weighed down by a stronger US dollar, concerns over Chinese demand and the stockpiles of palladium held by the major producing countries and traders. Prices of platinum are expected to increase at a marginal CAGR of 3.1 percent from US$1,020.6/oz in 2016 to US$1,189.6/oz in 2020. Those for palladium are expected to increase at a relatively higher CAGR of 5.4 percent to US$796.5/oz in 2020.

Platinum and palladium quarterly price trends, Q4 2011 – Q3 2016

Source: Price Charts, Platinum Today, accessed October 2016.

Platinum consensus price forecasts, 2015 – 20F

Palladium consensus price forecasts, 2015 – 20F

Sources: Capital IQ consensus prices; Deutsche Bank, 4Q16 commodities quarterly: prices range bound, equities expensive, via Thomson Research, accessed October 2016

Orange boxes in the above graphs represent demand fulfillment capability; defined as the percentage of global annual demand of platinum/palladium, which can be met from existing global annual supply of platinum/palladium.

Supply and demand

Supply

  • Global platinum supply is expected to decrease by 2 percent, reaching about 7,228 kilo ounces (Koz) in 2016 as compared with 2015, due to reduced mined metal production. Supply from autocat recycling is expected to increase by about 10 percent y-o-y to 1,318Koz in 2016, as the impact of low scrap steel prices that reduced vehicle scrappage rates in 2015 has continued through 2016.
  • Global supply of platinum is expected to increase slightly at a CAGR of 2 percent from 7,228Koz in 2016 to 8,040Koz in 2020 since lower refined production from South Africa and Russia offsets production gains from other regions and recycling.
  • South African platinum supply is estimated to decrease by 6 percent y-o-y to 4,166Koz in 2016 due to shaft closures in 2015, while supply from Russia is estimated to decline by 5 percent to 710Koz in 2016 following a refinery closure.

Primary global supply of platinum, 2015 – 20F

Primary global supply of palladium, 2015 – 20F

Source: Deutsche Bank, 4Q16 commodities quarterly: prices range bound, equities expensive, via Thomson Research, accessed October 2016.

*Autocat recycling refers to the process of refining precious metals contained in scrap automotive catalytic converters; F refers to forecast data.
 

Primary platinum supply breakup, 2016F

Primary palladium supply breakup, 2016F

Source: Deutsche Bank, 4Q16 commodities quarterly: prices range bound, equities expensive, via Thomson Research, accessed October 2016.

Demand

  • In 2015, despite significant uncertainty over diesel shares and vehicle emissions, platinum autocatalyst demand has stabilized through increased light vehicle sales in Western Europe. Net platinum requirement for industrial use is expected to reduce by 2 percent in 2016 due to weaker demand for use in glass fabrication, petroleum processes and electrical components.
  • Strong demand for jewelry from India, the US and Western Europe has offset the decline in demand in China and Japan, resulting in stable demand for platinum in jewelry. Closure of the refinery expansion projects in Western Europe and slower capacity growth in China are expected to reduce platinum demand in the petroleum industry in 2016.
  • Global demand for platinum is expected to increase marginally at a CAGR of 1.3 percent, from 7,637Koz in 2016 to 8,142Koz in 2020, due to the anticipated decline in Chinese jewellery consumption and lower platinum demand in the electrical, petroleum and glass sectors.

Platinum global demand, 2015F – 19F

Palladium global demand, 2015 – 20F

Source: Deutsche Bank, 4Q16 commodities quarterly: prices range bound, equities expensive, via Thomson Research, accessed October 2016.

*Autocat recycling refers to the process of refining precious metals contained in scrap automotive catalytic converters; F refers to forecast data.

Demand distribution for platinum, 2016F

Demand distribution for palladium, 2016F

Source: Deutsche Bank, 4Q16 commodities quarterly: prices range bound, equities expensive, via Thomson Research, accessed October 2016.

Key developments

Ownership changes

The total value of deals declined to US$13 million in Q3 2016 from US$61 million in Q4 2015. The number of deals increased to three during Q3 2016, from two deals in Q2 2016. The major deals during Q2 and Q3 2016 were:

  • On 28 June 2016, China-based Hebei Zhongheng Tianda Platinum acquired Barplats Mines, a metal ore mine operator, from Eastern Platinum, for US$50 million.
  • On 4 July 2016, Eastern Platinum entered into an agreement to acquire an additional unknown minority stake in South African platinum group metal business from minority interest partners for US$13.4 million.

On 01 November 2016, Anglo American Platinum Limited completed the sale of its Rustenburg operations through its wholly owned subsidiary Rustenburg Platinum Mines to Sibanye Rustenburg Platinum Mines Limited for US$95 million — the deal was earlier announced on 09 September 2015.

M&A deal number and valuations, Q2 and Q3 2016

Source: MergerMarket and Thomson One accessed October 2016.

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