Should you be investing in platinum as analysts predict record supply deficit later this year?

Recent reports have highlighted issues in the global supply of platinum, a metal in increasing demand, that could see a record deficit in supply this year. Demand is forecast to leap 28% this year while supply bottlenecks reduce output. As a result, the World Platinum Investment Council (WPIC), an industry body, has revised its predicted market deficit up by 77% compared to three months ago.

WPIC director of research Edward Sterck is quoted by the Financial Times as saying the expected 983,000 ounces market deficit this year would be the most significant since the 1970s. If demand meets expectations, around 12% will not be able to be met by either new supply produced by mines nor recycling. The last time that happened was in 1999.

The FT notes that platinum gains of almost 20% since the metal’s most recent lows in February, and the expected supply crunch, have not gone unnoticed by professional fund managers. Many have turned to ETFs that track the platinum price and are backed by the physical metal for exposure to the commodity. Something that could also appeal to more adventurous private investors looking for short to medium term opportunities to turn a profit.

Why is platinum in such high demand?

It’s relative scarcity, softness making it conveniently malleable, attractive white colour and tarnish resistance means platinum is perhaps best known as a precious metal used in jewellery.

However, the majority of demand for platinum is actually industrial and it is that demand that is growing quickly. The rare metal’s high melting point, the fact it’s highly unreactive, and is a good catalyst are the qualities that are most important to its industrial applications.

Some of the most common industrial uses of platinum include:

Catalytic Converters in automobiles: more platinum is used in catalytic converters for automobiles than anywhere else. These devices reduce harmful emissions from vehicles by converting pollutants into less harmful substances.

Fuel Cells: Platinum is used as a catalyst in fuel cells, which convert chemical energy into electricity.

Chemical Industry: Platinum is used as a catalyst in the chemical industry, particularly in the production of nitric acid, silicones, and benzene.

Electronics: Platinum is used in a variety of electronics, including computer hard disks and thermocouples. It’s also used in the manufacture of LCD televisions.

Dental and Medical Tools: Platinum’s biocompatibility and resistance to corrosion make it useful in a variety of medical and dental applications. It’s used in pacemakers, stents, and in dental fillings and crowns.

Glass Manufacturing: Platinum equipment is used in the production of glass, due to its ability to withstand high temperatures and its non-reactive nature.

Petroleum Refining: Platinum catalysts are used in the refining of petroleum.

Electroplating: Platinum is often used for electroplating to provide a corrosion-resistant and decorative coating.

Spark Plugs: Platinum is used in spark plugs for certain types of engines because of its high melting point and conductivity.

What is causing the supply deficit?

The WPIC’s analysis of the platinum market highlights the rising number of catalytic converters being manufactured and sold due to tightening emissions regulations for newly manufactured non-electric automobiles.

Global demand for electronics which often use platinum is also steadily rising. The other major factor on the demand side is China’s post-pandemic return to industrial expansion.

However, the biggest factor in the predicted deficit of platinum supplies this year is supply-side issues.

Major countries in global mine production of platinum in 2022(in metric tons)

Source: Statista

South Africa is by far the biggest supplier of platinum, producing almost 3 times as much of the metal as mines in the rest of the world combined and seven times as much as Russia, the next largest supplier. South African platinum production is expected to plunge this year as a result of major power outages in the country resulting from the crisis at utility Eskom Holdings.

Buying platinum from Russia, the next largest producer, is also highly problematic for much of the world due to sanctions imposed in response to its invasion of neighbouring Ukraine.

Just as significant as the expected hit to new production is a drop in the volumes of recycled platinum reaching the market as, says Bloomberg, scrap yards and dealers withhold the metal from the market. That suggests they anticipate significant further platinum price rises this year.

How long is the window of opportunity likely to be and how risky is commodities investing?

Commodities investments are notoriously fickle and subject to volatility as supply and demand fluctuate. If demand increases, there is almost always a significant lag in increasing the supply of mined metals if production cannot be significantly boosted from existing mines. It takes time to develop new mines or extend capacity in existing properties, making supply relatively inelastic and vulnerable to any major shift in demand patterns.

But that dynamic works both ways and platinum prices have only recently returned to a bull market after a slump in demand resulting from a drop in automobile production led to oversupply. Less cars coming off production lines due to a shortage of chips meant less catalytic converters being manufactured.

Some analysts also point out the impact a struggling global economy could have on demand for the electronics and glass the metal is also used for. However, the WPIC is convinced any short-term drop in demand for consumer electronics will be more than compensated for by a surge in demand from China as it expands its glass and chemicals production capacity.

In the medium to longer term, the phasing out of internal combustion engines represents a threat to platinum demand, even as tighter emissions rules in the meanwhile boosts it. However, with platinum prices still about 70% lower than they were a decade ago, there could well be plenty of potential upside over the next few years while supply is recalibrated.

However, investors should view any direct investment in commodity prices are relatively risky and potentially volatile.

Investing in platinum – how can private individuals gain investment exposure?

There are two main ways to gain investment exposure to platinum:

• Equity investments in platinum miners
• Direct exposure to the physical metal via ETFs

Until recently, fund managers have demonstrated a preference for investing in the equity of platinum miners for exposure to the metal. Anglo American Platinum, a subsidiary of London-listed Anglo American, is the world’s largest producer of the metal. Its South African mines account for between 30% and 40% of global supply.

Investors can buy shares in Anglo American Platinum directly, it is listed on the Johannesburg Stock Exchange, or gain diluted exposure via the parent company. The second largest supplier is another South African and Johannesburg-listed miner Impala Platinum.

Platinum miners are, to a greater or lesser extent based on how much the metal contributes to overall output, a proxy for the platinum price. However, share prices are also impacted by many other factors. A perfect example would be the negative impact electricity outages hitting production are currently having on South African miners.

For direct exposure to the price trends of the metal itself, investors can consider ETFs which track the price and are backed by physical holdings. UK-based investors have easy access to London-listed platinum funds including:

• abrdn Physical Platinum Shares ETF
• iShares Physical Platinum ETC

Should you invest in platinum?

A direct investment in a commodity like platinum via an ETF, or even in the form of equity in a platinum-focused miner, is not for all investors. As already mentioned, commodity investments are historically volatile and are best suited to more sophisticated investors as well as those willing and able to track the market for catalysts that could change demand and supply dynamics, impacting prices.

However, more experienced investors may well find the current prospect of a major platinum supply deficit an enticing opportunity.

The post Should you be investing in platinum as analysts predict record supply deficit later this year? first appeared on Trading and Investment News.
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