Platinum ETF Outflows Continue, Chinese Demand Grows
Thu Sep 15 2022
The platinum ETF segment saw a second consecutive quarter of declines in Q2, shedding 89,000 ounces from April through June.
Dipping to a 22 month low of US$824 per ounce at the beginning of September, platinum prices have begun to trend higher, supported by increased demand out of China, as well as the automotive, jewelry and industrial segments.
A seasonal casualty of the summer doldrums, platinum’s fundamentals for the rest of the year are expected to add to its current price momentum, which has pushed the metal back to the US$900 level. Despite a projected surplus of 974,000 ounces this year, the physical platinum market remains tight due to a resurgence in Chinese demand during Q2.
According to Trevor Raymond, director of research at the World Platinum Investment Council (WPIC), an additional 1.2 million ounces of platinum were imported to China last year above the country’s identified demand.
“We saw the same thing happen in the first half of this year,” Raymond told INN. “And forecasting that, it looks almost like an additional 1.3 million ounces above the identified demand in China; that could absorb the entire surplus.”
The WPIC's Q2 review, released in early September, notes that some of China's excess supply “reflects the significant increase in loadings to ensure compliance with China VIa as well as continued substitution for palladium in gasoline vehicles.”
Heightened need out of China during the first six months of 2022 drove platinum lease rates to a historically high 10 percent in May, which is highlighted in the WPIC's press release for the report.
“The sustained high platinum lease rates we have been seeing throughout 2022 — the highest in ten years and higher even than those seen during the peak of the pandemic when moving materials was extremely challenging — are a clear indication of shortages of physical metal in the market,” Paul Wilson, CEO of the WPIC, wrote.
As Wilson added, the already tight market situation has been further compounded by constrained mine and recycled supply. Most notably, recycled supply stemming from spent catalytic convertors declined 20 percent year-over-year during the second quarter.
This trend is anticipated to continue as inflation and the chip shortage deter new vehicle purchases, and is expected to result in a 15 percent total reduction in automotive recycling for the year.
Q2 also saw a 7 percent drop in mine supply as production out of South Africa contracted by 3 percent due to “power outages, adverse weather conditions and operational challenges.” North American output was hindered as a result of a mine flood in Montana and processing maintenance in Sudbury, shrinking regional production by 13 percent.
The 21 percent year-on-year drop in mine supply from Africa and North America was offset by an increase in Russian output.
“In terms of Russian platinum production, the only reason that it's sort of up 18 percent (is the) flooding last year at the Norilsk Nickel mine,” Raymond said. “As a result of that flooding, 2021 output was depressed and 2022 output is at a normalized level, but it's certainly higher.”
Platinum investment demand mixed in Q2
The platinum investment demand category was mixed during Q2, as North American investors helped push bar and coin demand up to 70,000 ounces over the three month period.
“To have 70,000 ounces of bar and coin (demand) in a quarter, that's particularly strong by historic standards without question,” Raymond said. The US minted 80,000 ounces of platinum eagle coins — its second highest amount — due to increased demand.
“From a retail perspective, people are concerned about inflation, they're concerned about global risk," Raymond said. “They want alternative assets; they want hard assets. Gold is in demand and so is platinum.”
On the other side of the world, Q2 was marked with selloffs, which weighed on global investment demand growth.
“In, Japan, high yen-denominated platinum prices continued to encourage profit-taking among investors for the second consecutive quarter — albeit at a lower level to the previous quarter,” the platinum report reads.
The exchange-traded fund (ETF) segment also saw its second consecutive quarter of declines, shedding 89,000 ounces from April through June, which Raymond attributed to two factors.
“We've seen this huge blowout of it. And part of it, I have no doubt, is people drawing that simple conclusion — poor economics, poor vehicles, I'm selling this thing,” he said. “The other is that we do know that when people have times of high risk or stress, they tend to use precious metals as a source of liquidity, or margin calls on investments, all sorts of things.
He added, "Specifically in Europe, we've seen similar selling in gold ETFs and silver ETFs, certainly. Using the metal as liquidity is supposed to be expected.” Sustained risk aversion is expected to erode 550,000 ounces from total platinum ETF holdings this year.
While platinum ETFs have faced liquidation due to economic challenges, last year investors left the basket-style product and opted to invest directly in platinum-mining shares.
“I think it was a big deal, and certainly part of the outflows last year,” Raymond said. “And it turned out to be a fabulous strategy.”
According to the head of research at the WPIC, this was most evident in the dividend paid by Anglo American (LSE:AAL,OTCQX:AAUKF). “A US$4 billion dividend last year, and then another US$1 billion in dividends the first half of this year,” he said. “That strategy was good, (and) we certainly haven’t seen them switch back.”