Supply constraints could support platinum prices

Platinum prices have retreated from a 10-month high on profit-taking, after their steepest quarterly gain since the first quarter of 2008, but supply constraints could lift the market in 2023.

The precious metal traded down to $1,072/oz on Monday, having retreated from a 10-month high of $1,107/oz a week earlier. The market has climbed from a low of $843/oz in September, as purchasing activity from China has accelerated in anticipation of a ramp-up in industrial and automotive manufacturing following Covid-19 lockdowns.

Industrial demand for platinum is expected to weaken by 2pc in 2023 to 2.3mn oz, but that follows a record high in 2022, according to Heraeus Precious Metals. Demand for platinum catalysts, the largest segment of the market, is expected to recover to 650,000oz, partly offsetting a decline in glass manufacturing demand.

A return to typical utilisation rates at ammonia plants could stimulate platinum demand in 2023, after record high European gas prices prompted producers to cut their output and platinum consumption. Higher ammonia production increases platinum catalyst regeneration and replacement, and with European gas prices down by 75pc down from the peak in 2022 and year-ahead prices suggesting costs will remain lower in 2023, demand from ammonia producers is expected to rebound.

Traders at Canada-based TD Securities stopped short platinum trade as prices climbed, responding to increasing calls for a soft landing in the US economy and a return of risk appetite at the start of the year. A sharp rise in Commodity Trading Advisor (CTA) positioning during thin holiday trading lifted platinum prices above TD's stop.

Inflation is increasingly expected to moderate, supporting higher demand along with the faster-than-expected reopening in China. TD noted that there was evidence that Chinese gold buying, which contributed to a rally in that market, similarly boosting the other precious metals. But industrial platinum demand could be revised lower if the US and Europe enter recession this year.

Supply constraints that supported higher prices last year are expected to continue. Mining firms in South Africa, which account for around 73pc of global production, face rising input costs and curtailments to their electricity consumption during a continuing energy crisis.

Load shedding by electricity supplier Eskom is increasing as ageing coal-fired power plants are taken out of operation without sufficient new power generation to replace the shortfall. Grid constraints prevent the connection of new renewable capacity as a solution to the chronic power shortages. South Africa has faced a record series of blackouts this month as one of the units at its only nuclear plant was shut down in December for refuelling and maintenance.

Mining firm Sibanye-Stillwater reported a fall in its second and third-quarter production of platinum group metals (PGMs) including platinum, on a combination of geological issues, labour disputes, copper cable theft and load shedding. While the company reached a five-year wage agreement with unions in October, operations could continue to be disrupted in the coming months.

Anglo American Platinum (Amplats), the world's largest platinum producer, has reduced its platinum production guidance for both 2023 and 2024 to 1.65mn-1.85mn oz from 1.9mn-2.1mn oz previously, down from 1.9mn oz in 2022. The company expects output to fall further to 1.6mn-1.8mn oz in 2025.

Amplats cited lower grades at its Mogalakwena mine; infrastructure closures, geological ground conditions and end of mine life at Amandelbult; logistical constraints, higher input costs and load shedding as factors that will cut its output.

At the same time, Amplats expects its PGM unit cost of production for 2023 to increase to $990-1,050/oz from $950/oz in 2022, on "a continuation of high energy, chemical, explosives, diesel, and other imported input costs, as well as lower production."

Eskom's load shedding could rise to 250-300 days a year between 2023 and 2027, up from 48 days in 2021 and 141 days in 2022, according to analyst David Davis, in a report for Singapore-based Auctus Metals. That could result in a drop in platinum supply of 500,000-1mn oz in 2023-27.

Davis also expects Russian producer Nornickel's platinum output to fall by 5-10pc this year as the company has said that it cannot guarantee reaching its 2023 production targets. Russia accounts for around 10pc of global platinum supply and the war in Ukraine is expected to result in continued supply chain constraints and a lack of spare parts that could hamper Nornickel's long-term expansion and refurbishment plans.

By Nicole Willing