reuters 3-year PLaTINUM & PaLLaDIUM forecasThantechpmc.co.kr/pds/data/5.pdf · of -1% between 2013...

3-year PLaTINUM & PaLLaDIUM forecasToctober 2013

Date of release: 21 October 2013

reuters

Downloaded from Thomson Reuters Eikonby [email protected] on 12/12/2013 20:34:29

TabLe of coNTeNTs

1. Executive Summary 4

2. Economic Assumptions 9

3. Mine Production 13

4. Autocatalyst Scrap 16

5. Above-ground Stocks 17

6. Fabrication 19

- autocatalyst 19

- jewellery 22

- industrial 26

7. Investment 28


DISclAIMEr

Whilst every effort has been made to ensure the accuracy of the information in this document, the content of this document is provided without any guarantees, conditions or warranties as to its accuracy, completeness or reliability. It is not to be construed as a solicitation or an offer to buy or sell precious metal, related products, commodities, securities or related financial instruments. To the extent permitted by law, we, other members of our group of companies and third parties connected to us hereby expressly exclude:

All conditions, warranties and other terms which might otherwise be implied by statute, common law or the law of equity. Any liability for any direct, indirect or consequential loss or damage incurred by any person or organisation reading or relying on this document including (without limitation) loss of income or revenue, loss of business, loss of profits or contracts, loss of anticipated savings, loss of goodwill and whether caused by tort (including negligence), breach of contract or otherwise, even if foreseeable.

By continuing to read this document, you agree to all the above terms and conditions in their entirety.


4

confidential - not for distribution3-Year Platinum & Palladium Forecast - october 2013

1. execUTIve sUMMaryIn the period that has elapsed since the previous Three Year Platinum & Palladium Forecast in December 2012 we have seen a sharp decline in platinum prices despite what we regard to be a much-improved supply/demand fundamental outlook. This reflects the obvious reality that platinum and palladium prices can often show meaningful detachment from fundamentals, with the more relevant factors affecting the platinum price relating to the broader macro-economic environment that has to an even greater extent hit the gold price this year. (Gold is down 22% year-to-date in late October, compared with a 9% fall for platinum and a 2% gain for palladium.)

In the short term, we expect that the recent developments concerning both the partial government shutdown (resolved in mid-October) and the likely appointment of Janet Yellen to chair the Federal reserve should be positive for the precious metals complex. The shutdown will have served to impede economic growth at the margin which, all other factors remaining equal, is likely to defer the inevitable tapering of the US’ asset purchase programme. Meanwhile, Vice chair Yellen’s likely policies, should she assume the chair, are not expected to differ materially from chairman Bernanke’s accommodative stance.

That said, as we progress through next year into the medium term, we remain of the view that the precious metals complex is likely to witness a decoupling of prices between the PGMs and other precious metals. Gold and silver are expected to be more strongly influenced by the macro picture as economic growth returns, with stimulus being reduced and a positive real interest rate environment develops. By contrast, although PGM pricing is likely to face headwinds at this time we expect platinum and palladium to be supported by robust physical fundamentals that will prevail for both metals.

It is easy, however, to become over exuberant towards the outlook, should one lose sight of fact that above ground stocks for both metals remain substantial.

PlATINUM PrIcES

The South African-listed NewPlat ETF, a very visible source of stock allocation in 2013, exemplifies the fact that the market is not tight yet. (By our methodology we do not consider ETF activity as ‘demand’, but rather a transfer of ownership of stock). Notwithstanding, the remarkable uptake into this fund, with the accretion of now more than 0.7 Moz of platinum within the year-to-date has not had a clear impact on platinum lending rates or price. This confirms the depth of market liquidity; that stocks remain large and near-market. Therefore it is clear to us that for dollar prices to perform meaningfully we will need to see several years of recurring market deficits.

The supply and demand variables are briefly summarised overleaf, but among them, the most marked revisions since the previous report relate to expectations for mine production, which have again been lowered dramatically.

PlATINUM GrOSS SUrPlUS/DEFIcIT FOrEcASTS PAllADIUM GrOSS SUrPlUS/DEFIcIT FOrEcASTS

-1600

-1200

-800

-400

0

20162015201420132012

Thou

sand

oun

ces

Source: Thomson Reuters GFMSSource: Thomson Reuters GFMS

Dec-12 Oct-13

-750

-500

-250

0

250

500

750

20162015201420132012

Thou

sand

oun

ces


Dec-12 Oct-13

PlATINUM & PAllADIUM PrIcE FOrEcAST

600

800

1000

1200

Plat

inum

(US$

/oz)

Source: Thomson Reuters GFMS

Palladium

Platinum

900

1200

1500

1800

20162015201420132012

Palladium (U

S$/oz)


5


Although Anglo Platinum’s portfolio review process is now largely concluded, broadly in-line with earlier expectation, we are taking an increasingly cautious stance on the medium- to long-term prospects for the industry. With the apparent reduction of flexibility that producers have to run their businesses, the investment shortfalls that have already been seen are likely to continue. Projects are being brought on-line more slowly, several with a reduced scope and a small number are, in our opinion, at risk of being shelved altogether. In turn, though, this bodes well for prices, after several years of oversupply. We expect the modest gross deficit recorded in 2012 to be approximately repeated in 2013 before expanding to shortfalls of 0.3 Moz and 0.7 Moz in 2014 and 2015 respectively. From a forecast average of $1,490/oz in 2013, such developments should be firmly price-positive and help drive platinum to a forecast annual average price of $1,675/oz in 2015. By this stage we expect price appreciation to have started to hit price-elastic demand (in particular, some chinese jewellery demand), which will serve to moderate the scale of the deficit by 2016, while still necessitating a stock draw-down to lift prices further to average $1,750/oz.

PAllADIUM PrIcES

The palladium price has been dogged by releases of russian state inventory for over a decade. As a consequence of shipments from the East, we estimate that above-ground stocks (in the terminal markets) have risen to more than 10 Moz in recent years. Although so far in 2013 we have seen two episodes of russian metal clearing Swiss customs, we do maintain a long-held view that the country’s excess palladium inventory has been largely (if not completely) sold and that 2013 will mark the final year of meaningful shipments by the Gokhran of russia. This is not a new theory and such expectations by the investor community have doubtless been influential in closing the platinum: palladium price ratio from more than 4:1 in 2008/9 to barely 2:1 in 2013. Although priced-in to a large extent, we would still expect that any abatement of such shipments would to help drive positive sentiment, with palladium prices outperforming platinum.

Another potentially significant development will be the expected creation of a palladium ETF by ABSA, which was recently granted approval by South African regulators. South African awareness of palladium is less pronounced

PlATINUM DEMAND FOrEcAST rEVISIONS

6000

6500

7000

7500

8000

8500

20162015201420132012

Thou

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oun

ces


Dec-12 Oct-13

PAllADIUM DEMAND FOrEcAST rEVISIONS

6000

7000

8000

9000

10000

11000

20162015201420132012

Thou

sand

oun

ces


Dec-12 Oct-13

PlATINUM SUPPlY FOrEcAST rEVISIONS PAllADIUM SUPPlY FOrEcAST rEVISIONS

6000

6500

7000

7500

8000

8500

20162015201420132012

Thou

sand

oun

ces


Dec-12 Oct-13

6000

7000

8000

9000

10000

20162015201420132012

Thou

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ces


Dec-12 Oct-13


6


than platinum, but using the uptake to the platinum ETF as a proxy we would expect such a product, if launched, to be well received and have the potential to bid prices higher as stocks are transferred into it, and in so doing act as a buffer next year were the broader metals complex to come under renewed pressure from sell-offs.

We forecast substantial recurring gross deficits in the years 2014-2016, in excess of 1 Moz per year and as stocks are drawn down into fabricated product these are likely in our view to help drive prices higher, taking palladium through the $1000/oz barrier by 2016 and reducing the platinum:palladium price ratio to 1.7:1 by that year, the lowest since 2002.

uNDerLYING FuNDAMeNtALs

PlATINUM

Platinum mine production, which has been revised heavily lower since the previous forecast, is now expected to register a cAGr of -1% between 2013 and 2016. The bulk of the downward revision relates to substantially more cautious expectations for our outlook for South African production. We now expect South African output to record sequential year-on-year falls of between 1-3%. The reason for this adjustment is based on both asset-specific revisions, but also to our more cautious view on a top-down basis to the rate at which operations will recover from the extremely challenging operating environment of the past two years. At the mine level we have sharply reduced projections for a handful of assets out to 2016, including most notably the Impala lease Area, for which the ramp up as new shafts come on-line will be slower; and at Eland, where the change of project scope now sees production from only one shaft of the twin decline operation.

russian output is expected to reduce over 2013-14, before approximately levelling out for the final two years of the forecast. Elsewhere, we expect a robust 19% gain in Zimbabwe this year, with growth slowing thereafter, with the production growth being solely attributable to expansion that is underway at Ngezi. Similarly, Finland’s output is due to be sharply higher in 2013, due to the Kevitsa mine that was commissioned last year.

Supply of platinum from autocatalyst scrap is estimated to increase by a considerable 9.4% to a total of just under 1 Moz this year. Most of the rise was driven on a rebound from a somewhat poor performance last year in combination with increased scrappage from a similarly larger vehicle fleet. We expect platinum recovery from spent autocatalyst to continue to strengthen throughout the forecast, driven by a significantly aging vehicle fleet (particularly in the US) in combination with an increase in mainly platinum-based spent catalysts. We estimate platinum recovery to equal 1.3 Moz by 2016; the same level that palladium registered in 2010.

In comparison to our previous forecast we have made minor upward revisions to our expectations for platinum demand in autocatalyst applications. We now expect

PlATINUM SUPPlY/DEMAND

(000 ounces) 2012 2013 2014 2015 2016 supply

Mine production

South Africa 4,180 4,138 4,029 3,991 3,950

russia 804 757 731 728 718

North America 340 338 357 361 356

Other 462 543 549 565 575

Total mine production 5,786 5,775 5,666 5,645 5,599

Autocatalyst scrap 901 986 1,077 1,183 1,300

Old jewellery scrap 427 450 476 487 492

total supply 7,114 7,210 7,219 7,315 7,391

demand

Autocatalysts 2,947 2,932 3,164 3,394 3,544

Jewellery 2,268 2,419 2,501 2,566 2,359

chemical 440 537 600 628 487

Electronics 195 169 168 181 207

Glass 323 328 229 335 348

Petroleum 192 123 130 198 194

retail investment 299 217 168 131 99

Other industrial 534 549 587 589 571

sub total - demand 7,199 7,274 7,548 8,022 7,810

Gross surplus/(deficit) (85) (64) (328) (707) (418)

identifiable stock movements

Industry stocks 0 0 0 0 0

Exchange Traded Funds* (237) (720) (100) 250 300

sub total - stock movements (237) (720) (100) 250 300

residual surplus/(deficit) (321) (784) (428) (457) (118)

Average price $1,551 $1,490 $1,550 $1,675 $1,750

*negative values for ETFs are investment inflows, positive are outflows


7


demand to fall by a modest 0.5% this year to 2.9 Moz, but to perform considerably better over the 2014-2016 period, reaching 3.5 Moz by the end of the forecast. More stringent emissions legislation in combination with improved buying sentiment in Europe is expected to be the main driver. However, despite the improved scenario, platinum demand is estimated to remain well short of the 4 Moz recorded in 2007, which can be, among other factors, attributed to increased substitution into palladium.

Platinum demand from other industrial applications is expected to rise by a modest 1% this year, to a three-year high of 1.7 Moz, largely due to a strong rebound in demand from the chemical sector. Growth is expected to accelerate further over the next two years, with an annual average rate of 7%, thanks to continued recovery in demand from the chemical sector, accompanied by modest gains in other industrial uses. While aggregate demand is set to post a 6% decline in the final forecast year, the 2016 figure is slated to remain well below the 2012 level.

Global jewellery demand is forecast to rise by 7% to reach an estimated 2.4 Moz this year, its highest level since 2003, thanks chiefly to continued growth in china, where robust economic conditions along with rising personal incomes should continue to drive jewellery demand. We expect global jewellery fabrication to expand further over the following two years, albeit at a slower rate of 3% on average, largely due to more modest gains in china, before slipping 8% in the final forecast year. That said, the forecast total for 2016 is estimated to remain some 4% above the level seen last year.

retail investment is forecast to post successive losses in each forecast year, falling by 67% over the period to a six-year low of 99,000 ounces by 2016. This sustained weakness should largely be attributed to easing appetite in Japan, as a rebound in platinum prices will undermine bargain hunting and encourage profit taking.

Overall, therefore, the gross deficit in the platinum market is forecast to grow rapidly, rising to a 13-year high of 707,000 ounces in 2015. While the tightness of the underlying market is expected to ease slightly thereafter, the gross deficit will remain sizeable in 2016. As a result,

we expect a fair portion of above-ground stocks of platinum to be released into the market in order to fill the gap, with total stocks slipping below 2.8 Moz by end-2016, a level last seen in 2009 and equivalent of roughly four months’ demand cover.

PAllADIUM

Palladium mine production is expected to maintain a broadly flat profile over the term of the forecast, with production in 2016 expected to be 6.42 Moz; comparable to the volume expected for 2013. lowered expectation for South African platinum output brings about a corresponding drop in palladium which, like platinum, represents the dominant shift in our expectation versus the previous forecast. In russia, we hold a more negative outlook on production in the next two years, as Norilsk continues to produce from a larger proportion of lower

(000 ounces) 2012 2013 2014 2015 2016 supply

Mine production

South Africa 2,404 2,349 2,316 2,278 2,244

russia 2,627 2,577 2,550 2,600 2,600

North America 953 949 931 978 1,002

Other 529 560 566 570 576

Total mine production 6,513 6,436 6,362 6,426 6,422

Autocatalyst scrap 1,426 1,604 1,848 1,985 2,084

Old jewellery scrap 259 291 332 371 397

total supply 8,198 8,330 8,541 8,782 8,902

demand

Autocatalysts 6,070 6,188 6,511 7,124 7,578

Jewellery 651 599 549 508 482

Dental 650 645 620 590 506

chemical 369 397 347 356 338

Electronics 1,447 1,386 1,383 1,361 1,328

retail investment 37 69 59 50 55


sub total - demand 9,334 9,395 9,585 10,110 10,411

Gross surplus/(deficit) (1,135) (1,064) (1,043) (1,328) (1,509)

identifiable stock movements

russia 400 200 0 0 0

Exchange Traded Funds* (448) (100) (150) 500 300

sub total - stock movements (48) 100 (150) 500 300

residual surplus/(deficit) (1,184) (964) (1,193) (828) (1,209)

Average price $643 $720 $815 $950 $1,030

*negative values for ETFs are investment inflows, positive are outflows

PAllADIUM SUPPlY/DEMAND


8


grade disseminated ore, and model for output to fall to the lower half of the company’s recently updated guidance. In the years following, however, new projects being brought online within the Polar division have the scope partially to arrest the trend in falling grade; we thus project a slight pick-up in palladium production, to 2.60 Moz for 2015 and 2016.

canadian mine output is likely to benefit from project developments underway at the palladium-rich lac des Iles mine, but we retain a cautious view on some of the Sudbury nickel assets, explaining a projected drop in 2014. The United States is expected to record incremental gains from new mine developments by Stillwater Mining at its two Montana assets.

Secondary palladium supply from autocatalyst recycling is expected to increase significantly this year, driven by continued robust new car sales in the US, which subsequently is expected to boost the number of end-of-life vehicles being scrapped. Going forward we expect palladium recovery to continue to rise by an average 9% over 2014-2016 period, due, among other reasons, to developments in china, where the government has expressed its intention to scrap a number of old vehicles in the coming years.

In comparison to platinum, palladium use in autocatalyst applications is estimated to rise by 2%, to 6.2 Moz this year, setting it on course to reach another historical record. We expect this trend to continue for the remainder of the forecast, driven by substitution gains, stricter emissions legislation in various parts of the world and particularly persistent strong vehicle sales in the predominantly gasoline-driven regions of North America and china. consequently, palladium autocatalyst demand is set to grow by 7% on average throughout the forecast period, to reach an estimated 7.6 Moz by 2016.

Palladium demand from other industrial applications is forecast to fall by a modest 1% this year, largely attributable to further weakness in demand from the electronics sector, with these declines offsetting modest gains from the chemical industry and other industrial uses. looking ahead, we are expecting a 3% decline in aggregate demand over the 2014-2016 period, chiefly as a result of weaker demand from the electronics sector, accompanied by softer dental fabrication. As a result, global industrial demand for palladium is forecast to drop to a seven-year low of 2.3 Moz in the final forecast year, down by almost 11% from the 2012 level.

Palladium jewellery fabrication is forecast to weaken further this year, falling to its lowest level since 2003, with all major regions posting losses, apart from Europe, where carat palladium offtake is set to enjoy another strong year. looking ahead, global jewellery demand is forecast to decline at an average rate of 7% per annum over the following three years, as continued gains in Europe will not be sufficient to offset losses elsewhere. As a result, we expect the global total to drop to an estimated 0.48 Moz in the final forecast year, its lowest level since 2003 and down by near 26% from the level registered last year.

Despite a modest pick-up in investor interest in North America this year, palladium retail investment is forecast to remain sluggish over the next three years, with volumes averaging 58,000 ounces per annum.

The gross deficit in the palladium market is expected to grow throughout the entire forecast horizon, hitting a 16-year high of 1.5 Moz in 2016. With russian state sales forecast to come to an end this year, these considerable deficits need to be matched by liquidation of existing longs by private and institutional investors. As such, we expect a rapid rundown of above-ground stocks of palladium over the forecast, with the total falling towards 5 Moz by end-2016, equivalent to almost six months’ demand cover.


9

confidential - not for distribution3-Year Platinum & Palladium forecast - october 2013

2. Economic assumptionsIntroductIon

Thomson Reuters GFMS’ views for the forecast period are presented in the form of three probability-weighted scenarios, namely the Base Case, Scenario B and Scenario C. Under our Base Case, to which we assign a 55% probability, we expect the world economy to remain relatively weak this year, due to a still sluggish recovery in some major economies. Global GDP growth is, however, expected to pick up from 2014 onwards, largely as concerns over the Eurozone debt crisis eventually ease and the US economy returns to a healthy economic growth path.

Under our more bullish Scenario B with a 15% probability, the world economy is set to rebound in 2013 and improve further over the next three years, helped by higher growth rates in both the major advanced and developing countries. Central to this scenario are the policies being followed by the US government and the Federal Reserve, including a highly accommodative stance with respect to monetary and fiscal policies over much of the forecast. This should help to facilitate faster growth, but at the cost of rising inflation, with the latter reaching an annual average of 2.8% in the United States by 2016.

In contrast, under our bearish Scenario C, to which we allocate a 30% probability, we assume that no further easing measures take place in the United States, while a faster pace of fiscal consolidation emerges in Europe. World output growth is forecast to slow again this year and to remain relatively subdued over the remainder of the forecast period, particularly across the developed world. It is of note that we have recently lowered the probability of Scenario C, from 35% to 30%, reflecting a stronger than expected economic recovery, particularly in the United States and Japan.

The analysis below starts by describing the background to the current economic situation. We then discuss in more detail each of the three economic scenarios, with a particular focus on some key individual countries

EconomIc Backdrop

Despite improved global financial conditions and diminished risks in Europe and the United States, global economic activity has continued to expand at a subdued pace. The economic crisis in the Eurozone continues to weigh on growth prospects, restraining a meaningful recovery. A marked slowdown in economic growth in the Eurozone’s major economies, along with a sharp fall in growth rates in the region’s peripheral countries on the back of fiscal austerity and rising rates of unemployment, led to another meagre economic performance in the first half of the year. While economic activity is expected to slowly gain momentum in the second half, growth is likely to remain muted, while weak bank lending and the re-emergence of financial stability concerns remain major downside risks to the outlook.

Across the Atlantic, the US economy registered moderate growth in the first half of 2013, with some measurable recovery in the housing market, substantial gains in equity prices and a moderate improvement in labour market conditions. Despite some recent improvements, the automatic spending cuts and uncertainties associated with budget issues continue to weigh on growth prospects. Meanwhile, tighter financial conditions, persistently low inflation and still elevated unemployment pose additional risks that could derail the still feeble recovery. The outcome of the mid-September FOMC meeting, where Dr. Bernanke reaffirmed that the highly accommodative policy environment will remain in place, underscores just how fragile the recovery remains.

Elsewhere, while the major developing countries, including China and India, have continued to register much stronger

(%) 2013 2014 2015 2016

World 3.3 3.6 3.8 4.1

United States 1.9 2.3 2.5 2.7

EU-27 -0.1 0.6 1.2 1.5

Japan 2.0 1.6 1.5 1.2

China 7.7 7.4 6.9 6.7

India 4.9 5.4 5.8 6.0


REAl GDP GROWTh RATES - BASE CASE SCEnARIO

AnnUAl WORlD REAl GDP GROWTh RATES

GD

P gr

owth

% p

er a

nnum


Scenario B (15%)Scenario C (30%)

Base Case (55%)

2

3

4

5

20162015201420132012


10


growth than developed economies, economic growth has moderated, owing to weak external conditions.

thE BasE casE scEnarIo

Economic activity in the United States has continued to expand at a moderate rate, although the recovery remains fragile, with risks to the outlook still skewed to the downside. While the US Congress has passed a bill to reopen the government, after 16 days of partial shutdown, and raise the federal debt limit, the deal offers only a temporary solution and does not resolve the budget issues. Indeed, the bill only funds the government until the start of 2014 and extends the Treasury’s borrowing authority until February. The major threat remains a lack of further progress on impending fiscal issues, including the deep automatic spending cuts under sequester that continue to restrain economic activity and the need to adopt a comprehensive fiscal consolidation plan to put public debt on a sustainable path over the medium term.

In addition, despite further improvement in labour market conditions, the US employment level has remained well below pre-crisis levels. Among other factors posing a threat to the US economy is the tightening of financial conditions recorded in recent months, which could adversely affect the pace of recovery in the economy and labour market in the months to come. Taking all these factors into consideration, we foresee GDP growth to moderate to 1.9% this year. looking ahead, the US economy is set to rebound in 2014, with an annual average rate of 2.3%, driven by further improvement in US employment and stronger household spending. While we expect the economy to expand further in the latter years of the forecast, the pace of recovery is likely to moderate, as the scope for any further stimulus remains very limited with the excessive level of public debt and ultra-low interest rates.

Turning to the EU-27 economy, while economic activity is forecast to pick up moderately in the second half of 2013, the weak performance in most countries during the first half of the year is expected to result in yet another year of subdued or negative growth. The protracted weakness across much of the periphery, accompanied by fiscal austerity, weak banking systems and increasing rates of unemployment in most European countries, will continue to weigh on the region’s growth outlook. GDP is therefore projected to decline by 0.1% this year. The EU-27 economy is expected to return to a gradual recovery from 2014 onwards, driven by a slow recovery in domestic consumption and investment. That said, GDP growth is likely to remain sluggish next year, owing to weak labour markets and continued fiscal pressures. Once the pace of fiscal consolidation starts easing, economic growth is set to accelerate further, with an annual average of 1.4% in the final years of the forecast. Even so, we believe that the near-term growth will continue to be significantly below potential as a result of high levels of public debt and unemployment.

Japanese GDP growth has improved moderately in recent months, boosted by new fiscal and monetary stimulus. In addition to a 10.3 trillion yen package introduced by the Japanese government early this year, the Bank of Japan (BoJ) has also agreed to double the country’s money supply in an effort to spur inflation and revive economic growth. The economy is forecast to grow at an annual average of 2% this year, as a result of a gradual recovery in domestic consumption and a pick-up in exports, led by a weak yen and a moderate recovery in external demand. The pace of economic growth is expected to slow in 2014, to an annual average of 1.6%, as the national sales tax hike, confirmed by the government, is set to weigh on consumption, while the effect of recent stimulus measures is likely to wane. looking ahead, a lack of structural reforms and its worsening sovereign debt situation are likely to restrain the country’s growth over the longer term, which is forecast to average 1.4% per annum in the final years of the forecast.

While we expect the Chinese economy to pick-up modestly in the second half of 2013, on the back of robust domestic activity and a gradual recovery in external demand, a weaker-than-expected expansion in the first half is expected to lead to the full-year growth of 7.7% in 2013. We expect economic growth to moderate further next year, to an annual average of 7.4%, as a rebound in inflation could force the central bank to revert to modest policy tightening. In addition, subdued demand from Europe, China’s biggest export market, will continue to weigh on the country’s export sector. As we move into the latter half of the forecast, China is expected to have shifted to a lower,

US$

/Eur

o


1.1

1.2

1.3

1.4

20162015201420132012

Scenario B (15%)Scenario C (30%)

Base Case (55%)1.5

US$:EURO RATES


11


but more sustainable and balanced growth path. This could see real GDP growth average 6.8% per annum over 2015 and 2016.

Economic activity in India slowed further in the first half of 2013, due to a combination of weak external conditions and recently implemented measures aimed at bringing inflation under control. While we expect the economy to rebound in the second half of the year on the back of stronger growth in capital investment, supported by a gradual recovery in external demand, we believe that relatively tight monetary conditions, which are likely to remain in place amid ongoing inflationary worries, will restrain economic growth to an annual average of 4.9% this year. Economic conditions are set to improve over the next three years, driven by a favourable external demand outlook and domestic structural reforms to boost business confidence, with an annual average of 5.7% over 2014 and 2016.

The US dollar is forecast to average $1.33/€ this year. Sustained economic recovery in the United States (compared to still sluggish growth in the Eurozone), accompanied by a gradual tightening of the Fed’s monetary policy, should see the US dollar strengthen against the euro over the forecast period, leading to an annual average of $1.27/€ in between 2014 and 2016.

scEnarIo B

Scenario B features a more positive tone for the world economy, which is set to rebound this year, to an annual average of 3.6%, and expand further to average 4.3% for the remainder of the forecast.

Critical to this view are expansionary fiscal and monetary policies implemented in the United States, which should see US GDP growth accelerate over the next three years, to an annual average of 3.0%. It is worth stressing that stronger economic growth will be achieved at the expense of higher inflation, which is forecast to rise from an estimated 1.9% this year to an annual average of 2.8% by the end of the forecast. Against this highly accommodative

backdrop, we would also expect to see the US dollar weaken through to 2016. nevertheless, we believe that amid rising concerns over the sustainability of US debt in the long term, it would become essential for the United States to take concrete debt management measures towards the end of the forecast, for example in the form of credible and substantial fiscal tightening.

Under Scenario B, the EU-27 economy over the next three years is set to expand at a faster pace than under our Base Case, driven by a more notable recovery in domestic demand and a strengthening external demand, supported by the ECB’s accommodative monetary policy stance. GDP growth is estimated to average 1.7% per year over 2014 to 2016, compared to a mere 1.1% growth over the same period under the Base Case. Implicit in this scenario is that investors’ concerns over the European sovereign debt crisis will remain heightened over the forecast period in spite of improved economic growth.

The Japanese economy is projected to post a more noteworthy recovery under Scenario B, with an annual average of 1.8% over the next three years. The firmer economic recovery will be driven by a more positive trade growth outlook on the back of improving global conditions.

Export industries in emerging countries are also expected to benefit from stronger economic activity in the major advanced economies. This will be the case particularly for the Chinese economy, which is forecast to grow at an annual average of 7.4% over the next three years. Under this scenario, the major risk for China’s economy is associated with a lack of transparency in local government debt, which could potentially raise worries over the debt situation in the country. Elsewhere, we are looking for stronger GDP growth in India, with an average of 6.4% per annum between 2014 and 2016.

scEnarIo c

Under our more bearish Scenario C, global economic activity is expected to slow further this year, due to a

(annual averages, %) 2013 2014 2015 2016

Base Case Scenario 1.7 1.9 2.1 2.3

(Probability 55%)

Scenario B 1.9 2.3 2.6 2.8

(Probability 15%)

Scenario C 1.6 1.7 1.8 1.9

(Probability 30%)


InDUSTRIAl PRODUCTIOn GROWTh*

(annual averages, %) 2013 2014 2015 2016

Base Case Scenario 0.1 1.4 1.6 1.5

(Probability 55%)

Scenario B 0.3 1.8 1.9 2.0

(Probability 15%)

Scenario C -0.1 0.9 1.0 1.1

(Probability 30%)

*Advanced economies; Source: Thomson Reuters GFMS

US CPI


12


marked economic slowdown in both major advanced and developing countries. While we expect to see a moderate pick-up in activity from next year onwards, growth rates will continue to be well below potential and employment gains, particularly across the developed world, will remain weak at best. A key factor behind these sluggish growth rates is the high level of indebtedness of governments in developed economies, including the world’s largest single economy, where, as a result, fiscal tightening eventually takes place.

Economic growth in the United States is set to remain restrained over the forecast period, with an annual average of 2.0% between 2014 and 2016. In addition, the country’s export industries are set to struggle under this scenario from the sustained strength of the US dollar, which is forecast to hit an average of $1.20/€ in 2016.

The EU-27 economy will see another year of negative growth in 2013, reflecting the ongoing weakness in most European countries, unfavourable external conditions and feeble domestic demand. With growing concerns over the sustainability of public debt in the medium term, we expect more fiscal tightening to be implemented across the region. Economic performance is set to remain meagre for the remainder of the forecast, recording a weak 0.5% per annum between 2014 and 2016.

Economic growth in Japan is expected to remain subdued over the forecast period. Domestic impediments, coupled with the negative impact from anaemic external demand, will pose a major drag on the economy. GDP growth is projected to average 0.9% over the next three years.

Against this backdrop, economic growth in developing countries is expected to outperform the industrialised world substantially, partly as a consequence of the formers’ generally healthier fiscal positions. nevertheless, weak export markets will ensure that even developing economies will grow at a slower pace than under the Base Case. Although Chinese growth will most likely be the strongest

among the larger countries in this group, the possibility of a slowdown towards 6% cannot be ruled out in the coming years. The Indian economy, meanwhile, is projected to register an annual average growth rate of 5.2% over the next three years, against a 7.9% average over 2003-12.

REAl GDP GROWTh RATES - SCEnARIO B REAl GDP GROWTh RATES - SCEnARIO C

(%) 2013 2014 2015 2016

World 3.6 4.0 4.3 4.5


EU-27 0.0 1.3 1.8 1.9

Japan 2.2 2.0 1.9 1.5

China 7.8 7.7 7.4 7.2

India 5.1 6.0 6.5 6.7


(%) 2013 2014 2015 2016

World 3.1 3.2 3.3 3.4


EU-27 -0.2 0.1 0.5 0.8

Japan 1.8 1.1 0.9 0.8

China 7.6 6.9 6.5 6.2

India 4.7 5.0 5.2 5.4



13


3. mine productionINTRODUCTION

In the time that has elapsed since the issuance of our last PGM forecast, our outlook for production has been revised sharply lower. From a projection of fractional increase in mine production that was put forward in the first quarter of the year (for our ten year report), we now expect output to drop modestly during 2013-2016. The change in view centres on a more restrained (now downward) projection for South Africa in that we expect that the majors to record approximately flat production at the mine-by-mine level compared with output in 2012, before we apply a top-down allowance for unforeseen production problems. From the strike-depressed production levels in 2012, we no longer envisage a rebound in 2013 and are unconvinced it will be forthcoming in subsequent years.

To this end, led by South Africa, global platinum mine output is forecast to contract with a CAGR of -1% in the period 2013-16, to total 5.60 Moz in 2016. Palladium, as an associated co-product, is also expected to slide lower at South African mines, but at the global level forecast to remain at or around 6.4 Moz per year between 2013 and 2016, with expected compensation to come from slight growth in the United States and Russia.

SOUTH AFRICA

Following a 12% fall in platinum mine output last year, South African production is forecast to stay flat through 2013 and ease lower in the years following. As such, output is forecast to have fallen by 20% compared with the country’s peak level in 2006.

Anglo Platinum’s negotiation with government and organised labour concerning its restructure looks to be reaching conclusion with the plan broadly in line with what has been proposed for several months, namely

that platinum production capacity will be reduced by around 250,000 ounces per year in the near term and by a further 100,000 ounces in the medium term (a three year view). This centres around the curtailment of mining at Khomanani 1&2 shafts and Khuseleka 2 shaft, as well as certain mature declines at Union Section. The resources associated with these assets will be folded into the remaining three operating units that make up its Rustenburg Section. Khuseleka 1 will remain in production over the next 2-3 years, an extension compared with initial proposals, but will cease over the longer term , with Amplats’ production guided at 2.2-2.4 Moz of platinum over the next three years.

That the negotiations involved to arrive at this outcome have been underway for so long (formally tabled in Q1 following a year’s advance notice) creates meaningful cause for concern towards the industry’s ability to restructure when market conditions require it. Although an issue that goes beyond the scope of a three year forecast, this in turn raises questions around whether producers will be able to justify investment through a commodity cycle, if companies do not have the flexibility to downsize when the market necessitates such a response. The ‘cost of production argument’ suggests to us that output should contract in the near term, given that on a cash costs + stay-in-business capex basis, over half of South African mines are failing to cover costs at the current spot prices. That said, we are not hopeful that a meaningful, proactive, response can be elicited, owing to issues of flexibility outlined above, especially concerning the large producers. Rather, over time the lack of capital investment in recent years will lead to ‘steady state’ operations’ output easing lower.

In the shorter term we also expect further losses as a consequence of labour disputes this year. The majors have yet to ink new wage agreements and they concede that the

(000 ounces) 2012 2013 2014 2015 2016

South Africa 2,404 2,349 2,316 2,278 2,244

Russia 2,627 2,577 2,550 2,600 2,600

Canada 557 563 541 565 572

United States 396 386 390 413 430

Zimbabwe 258 307 316 331 337

Others 271 253 250 240 239

World 6,513 6,436 6,362 6,426 6,422

Change (yoy) -5% -1% -1% 1% 0%


PAllAdIUM MIne PROdUCTIOnPlATInUM MIne PROdUCTIOn

(000 ounces) 2012 2013 2014 2015 2016

South Africa 4,180 4,138 4,029 3,991 3,950

Russia 804 757 731 728 718

Canada 220 222 233 227 218

United States 120 116 124 134 138

Zimbabwe 337 403 408 434 444

Others 125 140 141 131 131

World 5,786 5,775 5,666 5,645 5,599

Change (yoy) -10% 0% -2% 0% -1%



14


rift between union demands and company offers remains wide. We do expect this will lead to formal disputes and in turn for a new round of strikes to commence later in the year and negatively impact metal volumes into 2014.

Implats at its June year-end results outlined a growth profile suggesting slower ramp up progress so far at the Impala lease and a recovery to 850,000 ounces of platinum in the long term. This represents a meaningful drop compared with our expectations, involving a revision to our forecast of around 100,000 ounces by 2016. For Marula, operations have achieved annual target production capacity of 70,000 ounces and will likely continue on a steady state basis, whilst noting that it remains one of the industry’s high cost mines. lonmin, on the other hand, has performed reasonably well and we expect to see the Marikana operations return to steady state levels around 750,000 ounces of platinum per year in the short-medium term, although beyond the forecast its profile is likely to be determined by when (or indeed whether) its K4 project is reinitiated.

Compensating decreasing output from ongoing assets, the pipeline of credible projects is extremely slim and now the only project that we expect will have a meaningful influence on South African output within a three year horizon is Booysendal South, which was commissioned earlier in 2013. Although GlencoreXstata still see growth potential at eland, the profile has been aggressively moderated with one of the two decline projects having been suspended. Also suspended owing to its loss-making position was the remainder of the Crocodile River operation, earlier in 2013.

RUSSIA

Our forecast trajectory for Russian production has been moderated slightly. From a lower base of production in 2013 relative to 2012 we expect palladium output to fall

further next year, before recovering in the second half of the forecast, to amount to 2.60 Moz in 2016. Our expectation for platinum is that output will decrease throughout the forecast, to total 0.72 Moz in 2016. The thesis underlying this view is broadly similar to previous reports; that declining grade at norilsk’s operations will be the prevailing factor, only partly compensated by rising volume. As detailed in a strategy session that the company held recently, the onset of new shafts, such as the deep level Skalisty project (with, we expect, a slight improvement in grade), points to scope for a slight pick-up in PGM production starting from around 2015. Artel Amur, which operates the Kondyor operation in Khabarovsk recently outlined exploration success on a nearby deposit that will extend the life of that asset; we will continue to monitor whether this could lead to higher production, but for the time being we maintain our outlook that over time Russian alluvial platinum production will gradually contract.

NORTH AMERICA

Production from the United States is forecast to contract marginally in 2013, before rising through the remainder of the forecast. This primarily hinges on the expectation of an output rise from the country’s principal producer, Stillwater Mining. This increase is expected to come from its Montana mines, Stillwater and east Boulder. At the Stillwater mine the company has been advancing projects adjacent to the main assets with a view to extending mine life and growing production volumes. Output has been guided as flat at around 0.50 Moz of platinum and palladium over this year and next, before ramping up in 2015 following the onset of, in the first instance, the Stillwater mine’s Far West project, to be followed by Graham Creek adjacent to east Boulder. elsewhere, the eagle Mine in Michigan, sold by Rio Tinto

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to lundin Mining in June 2013, is expected to contribute modest volumes of PGM (as a by-product of nickel) from 2014.

In Canada we expect output to be broadly flat out to 2016. Although the project has been progressing more slowly than previously expected, we forecast growth from lac des Iles; the vertical shaft, which will hoist ore from the recently developed Offset Zone, is targeted to start now in late-2013. Further, the company is investigating prospects to mine using block caving, as opposed to longhole stoping to lift mining volumes and better utilise the operation’s high capacity mill. Countering this growth, we expect KGHM International’s PGM output from the Sudbury assets to contract over the next two years; we model for the levack and Podolsky operations to cease during the forecast, while the company’s Victoria project is seen as a longer term proposition. We assume that GlencoreXstrata’s mines will broadly maintain production over the next three years and for Vale’s PGM output to moderate to more ‘normal’ levels from a currently elevated rate of production.

ZIMBABWE

After a sharp increase expected for 2013, Zimbabwean output is forecast to grow modestly in the years 2014-16. logistical constraints, involving smelter downtime and a haulage strike in 2012 led to an accumulation of metal-in-concentrate that is being worked through this year and coupled with this, ngezi’s expansion continues. Although the political environment remains extremely challenging, we anticipate that, with current investments already well advanced, the likelihood that output will fall meaningfully as a consequence of the political environment is very low within a three year time frame. That said, the implementation of ngezi’s fourth decline shaft, Mupfuti (also known as Portal 3) is proceeding more slowly than was the plan a year ago. The other producing Zimbabwean assets (Mimosa and Unki) are expected to operate on a

steady state basis at around 100,000 and 65,000 ounces of annual platinum production.

OTHER REGIONS

‘Other’ countries will record higher platinum and lower palladium production this year, the former as a consequence of the onset and ramp up of Kevitsa in Finland, the latter as a result of lower production from the Tati nickel operation in Botswana. Thereafter we do not forecast drastic change, with potential expansion at Kevitsa not yet assumed under our base case. One ‘wild card’ that could add to production and should be flagged is that we do not allow for any PGM production from Colossus Minerals’ Serra Pelada project in Brazil (which has reported ‘bonanza’ grades in some drill results) until further detail is published on platinum and palladium reserves.

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4. AutocAtAlyst scrApIntroductIon

Last year, the recovery of platinum and palladium spent autocatalyst was unable to continue its strong performance, falling by a considerable 8% to 0.9Moz and 4% to 1.4Moz respectively. The large drop witnessed in platinum and palladium recycling was entirely centred in North America and Europe where scrapyards refrained from offering material on falling prices. This development was partly offset completely by the continued growth in other regions in combination with a stronger performance from Japan, which saw a mild rise in PGM recovery due to higher scrappage rates driven by a government-initiated eco-subsidy for new cars. The drop last year meant that PGM recovery has gone through a second year of contraction since the beginning of the millennium, in which the downturn of 2007 was the first. The 2012 decline, however, was materially different to that of 2007 as last year recyclers mainly held back sales volumes due to disappointing price levels whereas in 2007 buying simply dried up once the economic crisis emerged.

outlook

This year, however, we expect the growth trend of the last decade to re-emerge, despite that both metal prices are estimated to remain far below their previous highs. As a consequence, platinum recovery is forecast to reach just below 1Moz while palladium is set to increase by a healthy 12% to 1.6Moz. The main driver for this bullish scenario has little to do with platinum or palladium’s price performance, but is far more a function of increased levels of recycling driven by a steadily expanding global vehicle fleet. Indeed, it is estimated by official government bodies that the rate of vehicle scrappage runs close to 70-80% of new vehicle sales. Therefore, with vehicle sales rising this year, we estimate this will likely lead to an increase in end-of-life vehicles, particularly in the developed regions of Western Europe and the US. This is good news for scrapyards in the US where production of new vehicles, on the back of robust

sales numbers year-to-date, are forecast to rise 4%. In addition, with the US’ relatively old vehicle fleet of around 11 years, we expect vehicle replacement demand to find support in the coming years from that development too.

For the remainder of the outlook we remain optimistic for both platinum and palladium recovery from spent autocatalysts, driven by a more positive economic backdrop that will boost the sales of new cars, particularly in the developed regions. However, sales of new cars are also expected to continue to increase in China during our forecast, particularly inspired by the government issued and long-awaited Action Plan for Air Pollution Prevention and Control. As already detailed in the autocatalyst section of Chapter 6, the plan is to combat the steadily worsening air quality in various major cities by eventually scrapping all vehicles, that only comply to emissions legislation equivalent to Euro 1. Unsurprisingly we expect this to have a positive effect on car sales and recycling, although the growth of the latter will be more modest due to the relatively low amount of catalytic fitments required for Euro 1 compliance.

All in all, platinum recovery is therefore forecast to reach 1.3Moz in 2016, which equates to an average growth rate of just under 10%. For palladium we expect growth to be concentrated in 2013-2014 and slow subsequently to reach the 2Moz mark for the first time in its history by 2016.

PLATINUM AUToCATALyST rECovEry

(000 ounces) 2012 2013 2014 2015 2016

North America 412 440 452 459 467

Europe 311 342 397 460 535

Japan 57 62 68 80 87

other regions 120 142 161 184 212

total 901 986 1,077 1,183 1,300

y-o-y -7.8% 9.4% 9.3% 9.8% 9.9%

Source: Thomson reuters GFMS

(000 ounces) 2012 2013 2014 2015 2016

North America 922 1,025 1,145 1,185 1,185

Europe 317 334 405 440 474

Japan 84 96 106 122 132

other regions 104 149 191 238 293

total 1,426 1,604 1,848 1,985 2,084

y-o-y -3.7% 12.5% 15.2% 7.4% 5.0%

Source: Thomson reuters GFMS

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5. Above-ground stocksIntroductIon

This analysis includes our estimates for stocks held in the terminal market (implied from historical trade data), on futures exchanges and in physically backed exchange traded funds (ETFs). It also includes estimates for excess Russian government stocks of palladium (that which is deemed surplus and scheduled for sale), based on the assumption that sales of this palladium will conclude during the term of this forecast. In the absence of formally reported data regarding above-ground stocks in the terminal market (the largest element of our estimates) and uncertainties over Russian state holdings, we reiterate that these assessments represent our best estimates, and thus should be viewed as broadly indicative rather than definitive. This analysis excludes any stocks held separately by producers and consumers (industry stocks), although movements in such holdings can be inferred from time-to-time. As usual, alterations to our forecast supply/demand balances flow through to changes in the outlook for above-ground stocks.

Last year, both platinum and palladium recorded a gross deficit (whereby fabrication demand exceeded new supply), meaning that a portion of above-ground stocks need to be released into the market in order to fulfil the shortfall. Our estimate shows that above-ground bullion stocks of platinum and palladium (including ETF allocations) stood at 4.3M ounces and 10.0M ounces respectively at end-2012. Looking ahead, as the gross deficit is forecast to persist for both metals throughout the forecast horizon, we expect a rapid fall in above-ground stocks. While there remains a greater abundance of palladium stocks relative to platinum at the moment, we expect to see a significant degree of convergence over the forecast period. By end-2016, we expect the palladium to platinum stock ratio to contract to 1.8:1, against an equivalent ratio of 2.3 for 2012.

PlatInum

Last year, a sharp drop in platinum mine supply produced the first gross deficit (of 85,000 ounces) since 2004, leading to a modest fall in above-ground stocks to 4.3M ounces, equivalent to seven months’ demand cover. Prior to that, platinum stocks had increased substantially from less than 500,000 ounces at the end of 2005, which at the time afforded only negligible cover relative to fabrication demand. The bulk of this increase occurred in 2009 when the recession in the developed world caused both a sharp rise in the underlying gross surplus and significant de-stocking from industry sources in the face of a severe liquidity squeeze. As a result, above-ground stocks more than doubled, with further substantial gross surpluses also emerging in 2010 and 2011.

Turning to the forecast, the platinum market is anticipated to record a series of gross deficits from 2013 to 2016, with this shortfall forecast to breach 700,000 ounces in 2015, a level last seen in 2002. While such heightened levels will prove hard to be sustained in the following year, the gross deficit in the platinum market nonetheless will remain sizeable at 418,000 ounces in 2016. To a large extent, this growing tightness of the platinum market reflects a struggling mining sector, as platinum output in South Africa will maintain a downward trajectory over the forecast years. On the demand side, however, the picture is brighter, with solid improvements pushing total fabrication to hit new all-time highs in 2015, thanks to a recovery in autocatalyst demand and healthy jewellery consumption.

As a result, we expect a material decline in above-ground stocks of platinum from 2013 to 2016. By end-2016, total bullion stocks are slated to fall under 2.8M ounces or the equivalent of just above four months’ demand cover, the lowest level since 2009.

chAngES TO PLATInuM ABOvE-gROund BuLLIOn STOckS - zuRIch And FuTuRES ExchAngES cOMBInEd

(M ounces) 2011 2012 2013 2014 2015 2016

closing level at end-2010 3.60

gross surplus/(deficit) 0.79 (0.08) (0.06) (0.33) (0.71) (0.42)

Implied year-end stocks (minimum) 4.39 4.30 4.24 3.91 3.20 2.78

Fabrication demand 7.12 7.20 7.27 7.55 8.02 7.81

Stock cover, months 7.4 7.2 7.0 6.2 4.8 4.3

ETF holdings 1.40 1.64 2.36 2.46 2.21 1.91

Stock liquidity (maximum) 68% 62% 44% 37% 31% 32%

Stock cover, months (liquid stocks) 5.0 4.4 3.1 2.3 1.5 1.3

Source: Thomson Reuters gFMS


18


As for physical liquidity, allocations of platinum ETFs, while included in our overall stock estimates, are regarded as illiquid as they are unavailable for lending or to otherwise support trading activities. Since their inception in 2007, investors in these platinum ETFs had amassed 1.6M ounces by end-2012; accounting for 38% of above-ground stocks. Looking ahead, we expect positive additions to platinum ETFs through to 2014 before disinvestment takes place over 2015-2016. however, as non-ETF stocks decline rapidly and a gross deficit continues over the next couple of years, ETF allocations could well pose a growing threat to the availability of physical liquidity in platinum.

PalladIum

Above-ground stocks of palladium are estimated to have reached 10.0M ounces at end-2012, equivalent to around 13 months’ demand cover. While above-ground stocks are still substantial, they have been trending lower for more than a decade, as stocks had been gradually released into the market in order to meet a string of gross deficits over the same period. More importantly, it is worth stressing that ownerships of these above-ground stocks have gradually changed over the last decade or so, as off-market holdings of palladium (notably Russia’s but historically others like the uS auto industry) have been declining for a very long time, implied stocks of palladium in the terminal market have been rising as a result.

Looking ahead, we remain of the view that 2013 will then mark the end of this programme, with a modest level of 200,000 ounces of sales taking place at this time. This profile matches our own estimates of historical Russian palladium stocks, which we believe have been heavily depleted. That said, although we have marked out the end-game for these disposals it is important to remember that Russian holdings remain a state secret. As such, it is important to treat this series as indicative, both in terms of the absolute total and also the point at which this programme is brought to a close.

going forward, we expect gross deficits to persist through to 2016, averaging 1.2M ounces per annum over 2013-2016. In other words, we expect to see an acceleration in the rundown of above-ground palladium stocks. In terms of the interplay of supply/demand that will drive this outcome, higher recycling of spent autocatalysts and jewellery will prompt an increase in total supply, although gains will be restrained as mine production is expected to fall further this year and then remain broadly flat over 2014-2016. Set against this performance, global palladium demand is forecast to register a more robust increase over the same period, almost entirely the result of stronger trends in the autocatalyst sector.

Overall, therefore, above-ground stocks of palladium are expected to nearly halve over the forecast period to fall below 5.1M ounces by end-2016. To put this into perspective, stocks of palladium at the end of 2016 will represent around six months of demand cover, notably lower than the 13 months at the end of last year and a far cry from the equivalent 24 months at end-1999 when above-ground stocks stood at 18.4 Moz. Perhaps more significantly, this will see the differential between above-ground platinum and palladium stocks narrow considerably in the coming years, from approximately 5.7M ounces at end-2013 (in palladium’s favour) to only 2.3M ounces by end-forecast.

Interestingly, even if we exclude ETF holdings this differential is little changed. By end-2012 palladium ETF holdings stood at 2.2M ounces. While 2013-14 should see a small increase in palladium holdings, we expect heavy profit taking on the back of higher prices and a growing bearish sentiment towards gold. In the last two years of the forecast, the combined reduction in palladium ETF holdings is expected to be not far short of 1M ounces, with these releases forming part of the overall net disinvestment which will be necessary to balance the market - in other words fill the gross deficit.

(M ounces) 2011 2012 2013 2014 2015 2016

closing level at end-2010* 11.46

gross surplus/(deficit) (0.28) (1.14) (1.06) (1.04) (1.33) (1.51)

Implied year-end stocks* 11.17 10.04 8.98 7.93 6.60 5.09

Fabrication demand 8.85 9.33 9.39 9.58 10.11 10.41

Stock cover, months 15.2 12.9 11.5 9.9 7.8 5.9

ETF holdings 1.72 2.17 2.27 2.42 1.92 1.62

Stock liquidity (maximum) 85% 78% 75% 69% 71% 68%

Stock cover, months (liquid stocks) 12.8 10.1 8.6 6.9 5.6 4.0

* Includes estimated Russian government holdings Source: Thomson Reuters gFMS

chAngES TO PALLAdIuM ABOvE-gROund STOckS - zuRIch And FuTuRES ExchAngES cOMBInEd


19


6. Fabrication demandIntroductIon

Last year, platinum demand rose by 1%, to a four-year high of 7.2 Moz, with solid gains in jewellery offsetting falls in most industrial applications. We expect demand to remain broadly unchanged this year, as ongoing weakness in autocatalyst demand, compounded by a sluggish European market and continued substitution losses in diesel, should continue to mitigate gains in the jewellery sector and other industrial uses. A more notable recovery is likely to take place over the next two years, with total fabrication rising by 4% and 6% in 2014 and 2015 respectively. A gradual recovery in platinum’s autocatalyst demand, thanks to an improving sentiment in Europe and a strengthening automotive sector in China and the Other regions, along with solid gains in jewellery and other industrial applications should drive total demand to a fresh high of over 8 Moz by 2015. While autocatalyst demand continues to grow in 2016, a marked decline in jewellery fabrication, due to acute losses in China and Japan, is forecast to lead to a 3% drop in platinum demand, with volumes falling below 8 Moz in 2016.

After peaking in 2012, global palladium fabrication is set to rise at an average rate of 3% in each forecast year, posting successive record highs over the forecast period. Total offtake is estimated to hit 10.4 Moz in the final year of the outlook, up by 12% from the 2012 level. This will be driven by continued growth in autocatalyst demand, thanks to gains in global vehicle production in China and North America, where autocatalyst loadings are heavily weighted in favour of palladium. Palladium should also benefit from continued substitution gains in diesel applications at the expense of platinum. By contrast, jewellery demand is set to decline through to 2016, with all major regions posting losses, apart from Europe, where carat jewellery offtake is set to enjoy a period of uninterrupted gains.

AutocAtAlyst

overvIew

In comparison to our platinum and palladium forecast published in February this year we expect total vehicle production to remain broadly unchanged, however, with considerable alterations in individual regions. This year the automotive industry has provided a number of mixed signals, with significant investment announced in some markets being countered by cuts in others. We have upwardly revised our production units for this year in Europe, although European vehicle production is still forecast to contract this year, and also in Japan following 2012’s somewhat disappointing performance. On the other hand we have downwardly revised our expectations for this years’ vehicle production in China and in our “Other” region category, driven by both lower expected assemblies in the light duty as well as heavy duty sector.

When looking at the remainder of the forecast period we have slightly downwardly adjusted our expectations for 2014, while vehicle production in 2015 and 2016 has been upwardly revised. As a result, global vehicle production is estimated to reach 88m units this year and forecast to grow by an average 5.5% throughout the forecast horizon to surpass, for the first time in its history, the 100m units mark in 2016.

When looking at the vehicle growth profile in terms of the various regions’ contribution, the share of global vehicle growth from the mature markets of North America, Europe and Japan, aggregates to 17% over the 2013-16 period. Although this remains relatively low, it is a considerable improvement from our previous 2012-2015 forecast when the mature markets contributed a meagre 9% to global vehicle growth, while China took the bulk of 57% for its account. Despite the still positive outlook, that share has now been downwardly adjusted to 47% while emerging markets in other parts of Asia and Latin America have contributed in keeping the Other regions’ contribution stable at 36%. Unsurprisingly, it is particularly China and the Other region that are expected to continue to be the main drivers of vehicle growth going forward, increasing on average an impressive 10% and 7% respectively throughout our forecast.

In comparison to our previous forecast, we now expect demand for platinum in autocatalyst to fall by a modest 0.5% year-on-year to 2.93 Moz in 2013, while palladium is estimated to witness a small increase just shy of 2% to 6.2

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Moz. For the rest of the 2014-2016 outlook we remain considerably optimistic in regards to demand for both metals, driven by robust growth in autocatalytic applications and in turn the motor vehicle industry, mainly supported by two reasons. The first is the obvious continuation of strong vehicle sales in China and other developing regions, and to a lesser extend the Us. The other main driver for growth in autocatalytic applications will be the implementation of present and future more stringent emissions legislation particularly in both the Us and Europe for not only the lighter duty segments but also in the heavy duty diesel sector.

Indeed, new legislation implemented for European heavy duty diesel vehicles this year, light duty diesels and some non-road diesel engines next year enforces a further reduction of hydro carbons and NOx emission allowances, which for both gasoline-driven as well as diesel powered combustion engines is generally treated with various PgM-rich after treatment systems. But not just in the developed world are OEM’s forced to continue to extend on more fuel efficient and less pollutant omitting models, also in China, and other countries in the Asian Pacific region, various emission restrictions have been enforced in recent years. This in spite of various implementation delays due to,amongst other things, fuel quality issues. As a consequence of the above we expect demand for platinum and palladium to increase by 7.9% and 5.2% respectively next year and an average 5.8% and 7.9% over the remainder of the forecast, reaching a total of 3.5 Moz and 7.6 Moz respectively by 2016.

vehIcle ProductIon

In 2013, global light vehicle (Lv) production continued with its 4th consecutive year in setting a new production record and is currently estimated to reach 83m units, up 2.3% from 81m units the year before. This outcome is despite reduced annual production expectations for both

Japan and Europe where in case of the latter disappointing sales figures in peripheral as well as core-countries has continued to persist. In case of the former sales have continued to struggle, in spite of continued loose monetary policy, since government-funded cash incentives ended in september of 2012. Contrasting, in China, Lv production continued to boom and is expected to grow 11% annually, with total production forecast to reach around 20m units this year, which is equivalent to almost 25% of global Lv production. At that share, China is firmly establishing its position as global leader in motor vehicle production and sales, a position it established since 2009 when in overtook Japan as the world’s largest Lv producer.

Meanwhile, North America is estimated to leave behind the wild swings in production it has witnessed in recent years, following the sharp downturn during the start of the financial crises which forced the central administration to rescue its ailing automotive industry by introducing the well known cash-for-clunkers scheme, to reach a solid footing once again with growth equating to an estimated 4.1% this year. At 13m vehicles, production has virtually doubled since the crises started in 2007 and stands only 14% below levels recorded during the former hey-days of the American automotive industry at the beginning of the millennium. Particularly sales of pick-up trucks continued to rise and helped to boost sales levels thanks to a range of all new models as well as close-out deals to clear out dealer lots before the arrival of the new generation models.

For the remainder of our forecast we expect North America to continue to perform well in regards to Lv production driven by strong product launches and historically low financing rates, with an average growth rate of around 2.6%, reaching an estimated 14m vehicles by 2016. In terms of the fuel split, gasoline driven powertrains represent the overwhelming share in the region at 95% of total Lv production.

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Unsurprisingly, the prospects for the global Lv industry continues to be influenced by the economically sluggish performance of the European region, which, as already mentioned, is set for another year of decline in vehicle production, shaving a bit over 2% of the regions total to around 19m units this year. however, on an individual basis the performance of the various countries within the region remains a mixed bag with the UK recording solid output levels while demand in the core producing nation germany, despite relatively low inflation and economic solid progress, has seen better days.

Countries situated at the eastern part of the continent also played their part in the sluggish performance of the region overall, with russia as the leading example, struggling under a weak rouble and continued economic unease. however, looking forward, this year might well resemble the bottom of the misery in Lv vehicle output as projections from next year onward are set to turn positive again, increasing production by an annualised estimated of 2%. From then on things are projected to accelerate, driven by improved prospects in various countries, in turn lifting production to an average 4% over the 2015-16 period to 21m units by 2016.

In Japan, the earthquake and resulting tsunami had a major impact on the country’s domestic vehicle production in 2011, from which it swiftly recovered last year with growth amounting to 20%. however, with government eco-subsidies purchasing schemes ending last year Lv production is estimated to drop 4% this year to around 9m units. going forward, we estimate Lv production to continue to decline throughout the forecast, with maybe some consumers inspired to bring purchases forward before the sales tax rises from 5% to 8% in April of next year. We forecast domestic Lv production to fall on average 4% throughout the forecast to around 8m vehicles in 2016 as investment in production facilities overseas continues.

Following two years of modest improvement in Lv production, China is set to reach double digit growth again this year at almost 11%, reaching 20m units. since the majority of the Lv production (89%) is gasoline-driven, we

estimate that this year’s 2m vehicle production increase will be for 90% on the account of gasoline powertrains, with the remaining share being diesels. The more modest, though positive sentiment in the light duty diesel segment can be, to a certain extend, attributed towards improved fuel quality and less stringent tail-pipe emissions legislation, as compared to surrounding nations like Japan or Korea; China has still only adopted a nationwide Euro 4 equivalent, a policy that got replaced by Euro 5 in Europe back in 2009.

however, that is going to change, as the Chinese government issued the long-awaited Action Plan for Air Pollution Prevention and Control in september this year, which aims to significantly reduce the density of particulate matter in the air in Chinese cities over the next five years. According to the plan, the government intends to scrap all yellow-label vehicles (vehicles with emission standards below Euro I) in most parts of the country, with the remainders by 2015. Based on the initial assessment, if seriously implemented the Action Plan could help generate demand for at least 1m new Lv each year. Unsurprisingly therefore, we remain optimistic about the prospects of Lv production going forward and expect Chinese Lv production to grow by a similar 11% pa over the remainder of the forecast to around 27m vehicles by 2016.

In our Other region grouping Lv production is estimated to grow around 1.5% in 2013, down from 5% the previous year. This decline is mainly driven by a correction in the growth profile from various countries such as India, Thailand and Argentina, where 2012 turned out to be a strong post global recession recovery year. Post 2013, growth is forecast to accelerate at an average of 7.3% over the 2014-2016 period. India will most likely surpass south Korea’s 4.5m Lv output level by 2015, significantly contributing to the regions production of 28m vehicles by 2016.

In the heavy duty sector (hDs), on road truck volumes in the developed economies (where advanced emission standards apply) are expected to remain flat this year, with noticeable differences between the various regions. Indeed, where both North America and Japan are

(000 ounces) 2012 2013 2014 2015 2016

North America 447 458 490 516 523

Europe 1,311 1,249 1,342 1,479 1,530

Japan 322 289 260 260 254

China 184 246 314 357 388

Other regions 682 692 759 781 849

total 2,947 2,932 3,164 3,394 3,544

y-o-y % -4% -1% 8% 7% 4%

source: Thomson reuters gFMs

PLATINUM AUTOCATALysT FABrICATION

(000 ounces) 2012 2013 2014 2015 2016

North America 1,563 1,623 1,646 1,711 1,824

Europe 1,545 1,493 1,594 1,843 1,996

Japan 883 852 808 789 759

China 1,224 1,348 1,519 1,731 1,892

Other regions 856 872 943 1,049 1,108

total 6,070 6,188 6,511 7,124 7,578

y-o-y % 10% 2% 5% 9% 6%


PALLADIUM AUTOCATALysT FABrICATION


22


estimated to record decent growth expectations for this year at 2% and 5% respectively, in volume terms the equally large European region is set for a 2% decline, netting the end-result to zero growth. Looking forward, we expect hDs vehicle production to rise considerably in 2014 by 12%, after which growth is set to slow to 6% for all three regions combined in 2015.

PlAtInum demAnd

In comparison to our previous forecast, we have made modest upward revisions to our expectations for platinum autocatalyst demand over the total forecast horizon. As a result, we expect platinum demand to drop 0.5% to 2.9 Moz in 2013, but to perform considerably better over the 2014-216 period, reaching 3.5 Moz by the end. Although demand is set to significantly improve in comparison to the lows recorded in 2009, even at the end of our forecast demand is expected to be still short of its 4 Moz peak in 2007. various factors can be appointed to the decline in platinum use in autocatalyst applications, of which the foremost is the substitution into palladium, replacing mono-metallic platinum formulations into bi-metallic formulations.

The headwinds encountered in the Lv sector, seem less of an issue in the heavy duty sector, where platinum still enjoys almost exclusivity of use this year and steadily rising demand. however, despite continued healthy growth expectations for platinum usage in catalytic applications, mainly due to more stringent emissions legislation, we estimate that palladium will also witness a strong emergence in this segment, decreasing platinum’s share steadily throughout the forecast.

PAllAdIum demAnd

The outlook for palladium in autocatalyst applications remains positive and we now expect demand in

autocatalyst applications to reach 6.2 Moz this year, up 2% year-on-year, setting it on course to reach a new record for the fifth consecutive year. Looking forward we expect this trend to continue, driven by newly implemented or stricter enforcement of emissions legislation in both the Lv and hv sectors, along with substitution gains. This is supported by our estimation that palladium demand is likely to rise faster than projected growth in gasoline vehicle production.

In addition, palladium autocatalyst applications find their predominant usage in gasoline powered engines, which are widely used in regions such as North America, China and Japan, with the former two registering continued robust automotive sales. Therefore, palladium’s exposure to the far more sluggish performing European region has remained fairly minor, which stands in stark contrast to platinum. As a consequence, we forecast palladium consumption to average 7% throughout the forecast and surpassing the 7 Moz demand mark by as early as 2015 and reaching 7.5 Moz by the end of our forecast.

Jewellery

PlAtInum

ChINA

Chinese platinum jewellery fabrication posted a 9% year-on-year gain in 2012, reaching 1,423 Koz as strong demand in the first half outweighed slower sales for much of the latter part of the year. A $170 per ounce drop in the annual average price in 2012 was the key driver behind the hike, with the healthy retail activity witnessed during price dips helping to offset weaker consumer sentiment and a general decline in discretionary spending, both a function of the softer economic environment.

Looking to this year, the solid performance in the first quarter, followed by a price driven spike in demand in

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April is likely to lift the full year’s performance by 5% to an estimated 1,500 Koz, despite signs of weakening demand at the time of writing this report. Looking further ahead, platinum jewellery growth is expected to be influenced by the metal’s price trajectory and that of its yellow cousin, with growth constrained by the rising price environment. We expect Chinese jewellery demand to track higher in both 2014 and 2015, if only moderately, at an average of just over 3%, before slipping by more than a tenth in 2016 to an estimated 1,418 Koz as the platinum price is expected to jump by more than $150 an ounce that year.

Apart from the metal’s rising price being the primary stimulus for the demand growth slowdown, other factors will continue to support Chinese platinum demand across the forecast period, limiting the potential for a short term decline in platinum jewellery demand. For example, Chinese economic advancement and the growth of personal wealth will continue to fuel the appetite for high-end luxuries, with platinum jewellery just one such beneficiary. Additionally, rapid urbanisation of the country’s interior will lead to rising incomes of rural workers as well as continued expansion of retail outlets across second and third tier cities, bringing platinum jewellery closer to a significantly wider consumer base.

having said that, apart from bridal and diamond set jewellery where platinum is the metal of choice, 24-carat gold is expected to continue to dominate market share in the local market in the foreseeable future. Demand for 24-carat jewellery has exploded in recent years on the back of inflationary concerns and the public’s belief in gold as a safe haven investment. Indeed, 24-carat gold jewellery has evolved away from old fashioned designs and is now purchased with a dual purpose, for use as both an adornment and as an investment. With more fashionable items being offered, and at a relatively low mark up (compared to platinum), this means gold is likely to erode some shelf space at the expense of platinum.

Changes since our last forecast include a sharp revision of this year’s price, which, together with market information gathered from field research has prompted us to boost estimates for demand growth this year. In addition, a significant mark-up in price in the final year is projected to add to negative sentiment and has led to a modest downwards adjustment to our demand forecast that year.

In terms of platinum jewellery scrap, this year’s jewellery scrap volumes will remain largely unchanged as a lack of price volatility and range bound trading has not fuelled consumer recycling. Thereafter, the forecast price gains from 2014 will likely invigorate this sector of the market, pushing scrap supply higher by 10% in 2014, and then, following a modest rise in 2015, jump by more than a quarter in 2016, bringing the total scrap flow that year to 216 Koz, the highest since the peak of 273 Koz in 2008.

EUrOPE & NOrTh AMErICA

Platinum jewellery demand in western markets fell substantially over the last decade, dropping by 40% from 2000 to its low in 2009. This was largely price driven, as evidenced by losses being greatest in the more price sensitive fashion segment. Economic problems also contributed later on, with the 2009 fall more than twice as steep as the 2001-08 average. A recovery has been in place since then, thanks to growing sales by the international jewellery and watch brands. That said, the scope of gains has been limited due to elevated platinum prices, with the 2012 total only reaching a four-year high.

Turning to the outlook, we expect western jewellery offtake to rise by 9% this year, thanks to further gains in North America and a modest recovery in Europe. A combination of a firmer demand in the high-end sector and weaker year-to-date prices is expected to result in a 12% increase in North America. Following five consecutive years of contraction, European jewellery fabrication is set to post

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a modest recovery this year, thanks to a robust increase in demand from the major brands. A gradual recovery in economic conditions along with ongoing growth in exports of high-end jewellery and watches to emerging markets should continue to drive platinum jewellery demand in western markets over the next three years, with the 2016 total for both regions estimated to be some 20% above the 2012 level. Platinum jewellery scrap is set to ease this year, before trending gradually higher for the remainder of the forecast in response to higher platinum prices.

INDIA

In 2012, platinum jewellery consumption in India (including jewellery manufactured from semi-finished metal) was 99 Koz, witnessing a jump of 66%. This gain largely reflects the gain in sales of wedding bands and substitution in the high-end jewellery segment. Looking ahead, our estimates are that the jewellery consumption in India is estimated to rise by 10% in 2013 and thereafter stagnate into 2016. The drop in growth reflects substitution towards gold in the second quarter. That said, the high premiums in gold at local markets has helped shift some amount of consumption to platinum, more specifically, in the wedding band category.

JAPAN

In 2012, gross platinum jewellery demand in Japan is estimated to have reached 320 Koz, a rise of 13% on the previous year. Also, it marks the highest level since the financial crisis in 2008. however, compared to historical standards it was only roughly a quarter of the elevated level witnessed in the late 1990s. Looking back, the gains last year were largely a result of three factors. Firstly, aggressive marketing campaigns in late 2011 centred on ‘Kizuna’, which translates as ‘bonds’, encouraged increased purchases between family members and couples. secondly, release of some pent-up demand after sluggish sales in 2011 helped add to volumes in 2012 and, finally, and perhaps more importantly, bargain hunting when the price of platinum shifted to discount over gold.

Looking ahead, demand is estimated to edge higher by 9% this year to 349 Koz, but still lower than the pre-crisis levels. The fact that demand is limited to single digit growth this year is largely a function of the fall in gold prices which has resulted in a shift towards gold from platinum jewellery. Aside from price, platinum jewellery demand in Japan is also increasingly being influenced by a growing demographic shift, which we expect will see demand under pressure in coming years, and helps explain our forecast of declining fabrication demand looking ahead. We estimate that jewellery demand will stall in both 2014 and 2015, slipping just 1% in each year as higher prices dampens consumer sentiment, before retreating by more than 10% in 2016 to a five-year low.

Mature shoppers are no longer spending at the rate that they used to, while the younger generation has proved to have a declining appetite for ‘traditional’ luxury goods. secondly, marriages - a major event that drives volumes, are forecasted to decline and our discussions with contacts in the field revealed that the market share of the bridal sector for platinum jewellery has also been trending lower. Other factors, like a shift towards light weight jewellery and white gold has only weakened the outlook for platinum jewellery.

With regard to platinum jewellery scrap, last year this declined by over 25% to 257 Koz. This sizable drop can largely be attributed to the fall in local price towards 3,500 in JPy terms. however, this year scrap sales are estimated to rise by 9% reflecting the rise in premium of platinum over gold. Thereafter, we expect scrap to increase in both 2014 and 2015 (albeit at a modest level), rising an average 2% for those years, before declining by over a tenth in 2016, slipping to an eleven year low of 250 Koz.

PLATINUM JEWELLEry FABrICATION PALLADIUM JEWELLEry FABrICATION

(000 ounces) 2012 2013 2014 2015 2016

North America 224 250 239 248 255

Europe 196 208 222 235 248

Japan 320 349 345 340 303

China 1,423 1,500 1,565 1,605 1,418

Other regions 105 112 130 138 135

total 2,268 2,419 2,501 2,566 2,359

y-o-y % 9% 7% 3% 3% -8%


(000 ounces) 2012 2013 2014 2015 2016

North America 78 82 78 72 69

Europe 153 165 175 183 189

Japan 50 51 50 50 42

China 322 257 205 165 147

Other regions 48 44 41 38 34

total 651 599 549 508 482

y-o-y % -4% -8% -8% -8% -5%



25


PAllAdIum

ChINA

Following the peak of 1.03 Moz in 2005 palladium jewellery entered a downward trajectory with demand in China falling last year to 322 Koz. This trend is expected to continue in each year of the forecast with an average rate of decline of 18% across the period.

The decline observed last year was the lowest since 2009, retreating by only 6% year-on-year, on the back of the introduction of coloured gemstones and diamond-set pieces, as well as a degree of hesitancy in consumer spending on both gold and platinum jewellery, all of which have benefited palladium to some degree. Looking ahead, we envisage significant declines with fabrication falling by an average of 20% between 2013-15 then retreating 11% in the final year under review to just 147 Koz, the lowest since 2003. Central to this expectation lies in a number of persistent structural problems in the Chinese palladium market, with these issues magnified by the expected sharp rise in palladium prices during the forecast period.

Firstly, the unfavourable tax policies have been and are expected to hinder palladium purchases. Consumers have to pay a full 17% vAT rate, as opposed to a zero rate for purchases made through the shanghai gold Exchange when trading platinum. More importantly, palladium is not traded on local exchanges, which deprives the domestic market from access to a transparent pricing policy, hedging, or a physical source of supply of the metal. Furthermore, palladium has been suffering from low recognition in China (in contrast to platinum) with its relatively small scale promotion not delivering sufficient advertising to the wider market, and with the PAI (Palladium Alliance International) closing their office in China in 2013 only exacerbating this issue.

As a result of these factors, the manufacture of palladium jewellery is limited to a shrinking number of shenzhen

based fabricators that have the ability to make payments in international currencies, which enables them to source the metal in neighbouring hong Kong. Furthermore, the lack of a real two way retail market (although some retailers do offer limited swap services) is stifling palladium jewellery sales in China.

Palladium continues to face a stiff competition from platinum, the presence and recognition of which in China continues to expand, not to mention 18-carat white gold jewellery which has enjoyed sharp growth on the back of Chinese consumers’ strong affinity to gold jewellery. The combination of these collective factors act as a deterrent for well established and popular brands from hong Kong and mainland China expanding their jewellery portfolio with an increased range of palladium items.

One area of the Chinese palladium market that is expected to generate growth over the forecast period is the supply from recycled jewellery. Moreover, a shrinking consumer market, coupled with a rising price profile is expected to lift scrap supply by an average of 13% to 345 Koz by 2016. In addition, an improving PgM recycling infrastructure and network will also encourage higher volumes of metal recycling.

EUrOPE & NOrTh AMErICA

Western palladium jewellery demand fell by 2% last year, marking the fourth consecutive year of decline, with losses in North America offsetting steady gains in Europe’s carat palladium jewellery. Even so, western demand has seen its share of global palladium jewellery fabrication rise from just 11% in 2004 to a peak of 36% in 2012.

Looking ahead, palladium jewellery offtake in western countries is forecast to rebound by 7% in 2013, to a three-year high of over 246 Koz, driven by further expansion in European carat jewellery offtake, coupled with a modest recovery in the United states, helped by lower palladium prices. Over the following three years, combined jewellery

(000 ounces) 2012 2013 2014 2015 2016

Chemical 440 537 600 628 487

Electronics 195 169 168 181 207

glass 323 328 229 335 348

Petroleum 192 123 130 198 194


total industrial 1,684 1,706 1,714 1,931 1,807

y-o-y % 2% 1% 1% 13% -6%


(000 ounces) 2012 2013 2014 2015 2016

Chemical 369 397 347 356 338

Electronics 1,447 1,386 1,383 1,361 1,328

Dental 650 645 620 590 506


total industrial 2,576 2,539 2,465 2,429 2,296

y-o-y % 0% -1% -3% -1% -5%


PLATINUM INDUsTrIAL FABrICATION PALLADIUM INDUsTrIAL FABrICATION


26


demand is set to enjoy continuous gains, chiefly as a result of ongoing growth in Europe, largely in the bridal sector due to a price discount versus platinum, with these gains offsetting further weakness in North America. The rate of growth, however, is likely to ease in the latter years of the forecast, as palladium prices continue to rise and its discount to platinum falls from over $900 in 2012 to an estimated $720 in 2016. That said, the 2016 total is only slated to recover to 2010 levels. Net demand is set to grow a little faster than gross as we expect scrap to fall at an average rate of 10% over the next three years, before stabilising in the final forecast year.

JAPAN

Palladium usage in the Japanese jewellery industry is broadly limited to its role as an alloying component for white gold and platinum jewellery. Last year, demand is estimated to have increased by around 11%, due primarily to the strong offtake in platinum jewellery as prices declined and traded at discount to gold. Over the next three years, demand is set to remain broadly flat averaging around 48 Koz. This reflects stagnant offtake in the platinum and gold jewellery markets, given lackluster economic growth, adverse demographics and competition from other consumer products. In terms of carat palladium jewellery, there have been some marketing efforts to introduce this into the Japanese market, although at present consumer awareness remains relatively low. As a result, we do not expect to see significant growth in this product over the forecast timeframe. Overall, the series out to 2016 shows an upward revision by an average of 5 Koz.

IndustrIAl demAnd

Platinum and palladium demand in industrial applications analysed in this section is shown net of recycling and

includes end-uses such as electronics, glass production, oil refining, chemistry and the dental industry.

We start with platinum usage in glass applications. Demand from this sector relies heavily on capacity expansions for the production of glass substrate (used in LCD), as well as changes in fibre glass production capacity (for use in composite materials). In both cases, platinum is used in the vessels in which the glass is produced. Platinum demand from this sector retreated markedly in 2011 as demand softened, leaving overcapacity in substrate production.

LCD technology has expanded to achieve a near total dominance in the display market (initially in computing and, more recently, television displays). As a result, LCDs’ prospects for market share growth (a key feature of recent years) have diminished, with its potential now focused on increasing display functionality and larger screen sizes. In addition, there is a trend towards thinner glass substrates (reducing display weights and thickness), which is now moderating the need for capacity expansions.

Consequently, global platinum demand from this sector has flatlined in the past couple of years at around 330,000 ounces. however, this masks a continued shift in demand away from advanced economies to emerging markets. In particular, demand from Japan has dwindled this year as these producers have lost market share to China and Taiwan. given that LCD is now a mature technology, the pace of capacity additions is becoming more cyclical, with 2014 expected to be notably quieter before a recovery to more normal levels in 2015 and 2016.

In a similar manner to the glass sector, demand from the petroleum industry is largely dependent on the addition of new catalytic capacity in two downstream petrochemical

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processes: reforming and isomerisation. Additionally, demand comes from continuous metal loss replacement from a very large pool of already installed catalysts.

This year demand is estimated to fall by more than a third and offtake is set to remain at this low level in 2014. This is due to a combination of an abnormally low number of expansions in the Middle East and Asia combined with some closure of capacity in advanced economies where margins have been squeezed. In the final two years of the forecast demand is set to recover as refining capacity increases in emerging markets.

Platinum offtake in the chemical industry is dominated by demand from the manufacture of paraxylene, nitric acid and speciality silicones. Demand for platinum from the chemical sector is estimated to have risen by more than a fifth this year and is projected to continue rising to a peak of 628,000 ounces in 2015. This is almost entirely due to capacity additions in paraxylene production in China and other emerging markets. A cyclical downturn in demand from the paraxylene sector then starts in 2016. Meanwhile, demand for use in nitric acid and speciality silicones will remain resilient throughout the forecast.

Palladium demand in the chemical sector is largely dependent on capacity expansions in the production of purified terephthalic acid (PTA), vinyl acetate monomer (vAM) and catchment gauzes used in the synthesis of nitric acid. Palladium demand is set to rise rapidly in 2013, following strong growth in 2012. As a result, demand will almost match the peak achieved in 2006. Crucial to this is higher PTA and vAM production volumes, predominantly in China but also to a lesser extent in other developing countries. however, 2014 should see offtake drop, driven by high prices and capacity rationalization. Thereafter, demand is forecast to stabilize at an average of around 350,000 ounces.

Turning to electronics, palladium demand from this sector is estimated to decline by approximately 4% this year, to a 4-year low. This is being hindered by weak PC sales which is partly a function of a shift to handheld devices. We expect demand to continue to shrink as companies continue to thrift their usage of the metal, especially later in the forecast as the price of palladium rises.

In a similar vein, electronics demand for platinum, which is primarily in hard Disk Drives (hDD), is expected to fall sharply this year. This is because of an increased use of solid state drives instead of hDDs, with the former the prime option for increasingly popular ultrabooks, tablet computers and other mobile devices. That said, the

storage capacity of hDDs remains unrivalled, with new technology on the horizon to extend this even further. Alongside growing needs for data storage in general, the widespread use of cloud computing will require tremendous amounts of new storage capacity which can only be achieved through hDDs. Consequently, we expect a modest recovery in demand from this sector beyond 2014. There also remains potential for a greater rebound should new technologies gain acceptance.

Palladium dental offtake has shown a slight downtrend since 2010, as gains in the United states, mainly the result of price-led substitution from gold, have been more than offset by losses in Japan. The latter is chiefly due to structural factors, such as a shift to ceramics and improved dental hygiene. More of the same is expected for this year’s estimate, with the global total slipping by just 0.8%.

subsequently, however, dental losses are set to rise to an average of 4% over the next two years and to a more dramatic 14% drop in 2016. Key to this accelerating decline is our forecast for palladium prices to rise in absolute terms combined with the differential between palladium and gold narrowing from an annual average of over $1,000 in 2012 to $325 in 2015 and then disappearing in 2016.


28


7. INVESTMENTINTRODUCTION

Investment demand has been the principal driver behind the wide ranges and heightened volatilities in platinum and palladium prices since the middle of the last decade. Several factors have been behind the growth in investor activity. First, there has been a general rise in investment demand for precious metals, particularly gold, with both platinum and palladium benefiting from this trend, especially following the launch of exchange traded instruments. These launches reflect the second point of influence, which is the broad growth in investment demand for commodities as an asset class, boosted by a weakening US dollar against most currencies in recent years.

Finally, both metals’ supply/demand fundamentals have, on occasion, had a positive impact on investor sentiment. For example, supply concerns related to South African mine production have at times not only triggered a sharp rise in speculative inflows into the platinum market, but also provided support during periods of price weakness. In palladium’s case, the belief in its likely convergence with the platinum price, largely as a result of the former’s continued substitution gains in autocatalyst fabrication, has also frequently generated interest, as have expectations of a cessation of Russian government stock sales in the near future.

As illustrated in the table below, platinum and, palladium in particular, are expected to suffer from heavy investor selling across 2014-2016. Such a hefty disinvestment is primarily based on assumptions that both metals are projected to record gross deficits throughout the entire forecast horizon. This implies that PGM prices will need to rise substantially in order to generate the necessary release from bullion stocks in order to balance the market. Supporting this view is a sea change in investor attitude towards the precious metals complex year-to-date. As sentiment towards gold continues to deteriorate in the coming years, this will not only hamper fresh investor interest in white metals but also encourage existing

investors to lock in profits on the back of significant gains in prices in the latter part of the forecast period.

PLATINUM

Despite increasing headwinds on the precious metals complex year-to-date, investment demand for platinum has remained positive. This resilient investor buying to a large extent should be attributed to strong gains in platinum ETFs, itself almost entirely driven by the launch of the first platinum ETF in South Africa in April. Since its inception, appetite from local investors has surged, with the fund becoming the largest platinum ETF within four months. Behind such a robust increase was a growing desire to get direct exposure to the metal price rather than investing platinum mining stocks as producers have been struggling with rising costs and a lacklustre metal price.

Excluding the South African ETF, however, the picture was far more pessimistic, as total platinum holdings fell slightly year-to-date. Likewise, investors’ positions on Nymex, after hitting all-time highs early in the year also slumped as much of the uncertainty surrounding the South African mining sector had been “priced in”, with further downward pressure stemming from gold’s double dips in the second quarter and an increasingly cautious attitude towards commodities in general among institutional investors.

While ongoing improvements in platinum’s underlying supply/demand fundamentals in the coming years (stemming from a struggling mining sector along with a major rebound in the European automobile sector) will continue to encourage fresh allocations to platinum, we would expect the investor community to shift to become net sellers from next year onwards. The dramatic swing by investors as a whole is partly based on expectations of a shift towards tighter monetary policies and a secular rise in the US dollar as we progress into next year, both of which could weigh on investor confidence in the broad commodity sector. This, with a gradual return of firmer global economic growth and a stabilisation of the sovereign debt

(000 ounces) 2013 2014 2015 2016

Retail Investment 217 168 131 99

Exchange Traded Funds 720 100 (250) (300)

Residual Surplus (784) (428) (457) (118)

World investment 153 (160) (576) (319)

indicative Value (us$, mn) 228 (248) (965) (558)


PALLADIUM WoRLD INvESTMENT PLATINUM WoRLD INvESTMENT

(000 ounces) 2013 2014 2015 2016

Retail Investment 69 59 50 55

Exchange Traded Funds 100 150 (500) (300)

Residual Surplus (964) (1,193) (828) (1,209)

World investment (795) (984) (1,278) (1,454)

indicative Value (us$, mn) (572) (802) (1,214) (1,497)



29


situation in Europe, is likely to encourage investors to shift towards conventional assets such as equities. As investor sentiment towards gold is forecast to ease further over the next three years, this could undermine interest in the broader precious metals complex, which should hamper interest in platinum. In addition, it is worth stressing that above-ground stocks of platinum are still sizeable at the time of writing. Basis our current estimate, total stocks of platinum bullion stood at over 4.3M ounces by end-2012, a fair share of which were believed to have been accumulated during 2009-2012 when the price traded considerably lower than its peak in early 2008. As the platinum price is expected to rebound strongly from 2015 onwards, it is possible that certain investors will be keen to take profits, which helps to explain a sizeable amount of net disinvestment projected for 2015-2016.

Turning to components of platinum investment, a significant portion of fresh purchases this year have been accounted for by for by the newly listed platinum ETF in South Africa. Looking ahead, such heightened investor interest is unlikely to be sustained, although positive investment inflows into platinum ETFs are forecast to persist through to 2014, with global platinum ETF holdings approaching 2.5M ounces by end-2014. Thereafter, we expect redemptions of platinum ETFs to occur, with a

combined net disinvestment of 550,000 ounces projected for 2015-2016, as a rebound in prices could encourage liquidations of existing longs to meet a growing gross deficit in the platinum market.

Meanwhile, retail investment demand is set to fall at an average rate of just under 50,000 ounces per annum over the 2013-2016 period, with volumes reaching a six-year low of 99,000 ounces in 2016. Central to this will be a considerable decline in demand from Japanese investors, as the rapid rise in platinum price in late forecast will not only undermine bargain hunting but also encourage profit taking. In contrast, demand in western countries will remain broadly flat.

Finally, implied net investment (or the residual surplus) is forecast to remain in negative territory throughout the entire forecast period, although from a peak of over 780,000 ounces of net disinvestment this year, volumes are projected to fall below 120,000 ounces by 2016. The persistence of this disinvestment is a result of an increasing tightness of the platinum market in conjunction with healthy demand for platinum ETFs (at least through to 2014), both of which require dishoarding of existing longs (predominantly held by private and institutional investors at the moment) to fill the gap.

PLATINUM GRoSS SURPLUS/DEFICIT & PRICE PALLADIUM GRoSS SURPLUS/DEFICIT & PRICE

-800

-600

-400

-200

0

200

400

600

800

201620152014201320122011

Thou

sand

oun

ces


US$/oz

1400

1500

1600

1700

1800

Platinum PriceSurplus

Deficit

-1600

-1200

-800

-400

0

201620152014201320122011

Thou

sand

oun

ces


US$/oz

600

700

800

900

1000

1100

PalladiumPrice

PLATINUM ETFs - END yEAR PALLADIUM ETFs - END yEAR

0

500

1000

1500

2000

2500

201620152014201320122011

Thou

sand

oun

ces

Source: Thomson Reuters GFMSSource: Thomson Reuters GFMS; respective ETF issuers

US$/oz

1400

1500

1600

1700

1800

PlatinumPrice

0

500

1000

1500

2000

2500

201620152014201320122011

Thou

sand

oun

ces

Source: Thomson Reuters GFMSSource: Thomson Reuters GFMS; respective ETF issuers

US$/oz

600

700

800

900

1000

1100

PalladiumPrice


30


PALLADIUM

After shifting to become a net seller in 2012, the investor community is forecast to remain on the supply side of the palladium market throughout the entire forecast period. From a net disinvestment of just below 700,000 ounces last year, World Disinvestment is projected to post successive gains over the next forecast period, with volumes exceeding 1.4M ounces by 2016, the highest ever figure on our record dated back to 1999.

The forecast persistence of disinvestment in the palladium market may seem counterintuitive, given our expectations for palladium prices to rise over the forecast period. Key to this is that higher prices may trigger heavy profit taking from some investors. Meanwhile, an increasingly cautious attitude towards the broad commodity sector, gold in particular, among institutional investors year-to-date, may well also encourage certain investors to shift back to conventional assets in the coming years, especially at times when the world economy continues to gain traction and central banks start to withdraw previous monetary stimuli.

At the moment, our estimate suggest that above-ground bullion stocks (including ETFs) stood at just over 10M ounces at end-2012, the majority of which had been accumulated by investors at considerably lower prices. The forecast rise in palladium prices over the 2013-2016 period should mean that a good part of these stocks will be liquidated. Integral to this selling is investor awareness that it is wiser to redeem a position into a rising trend, rather than face a rush for the exit should prices reverse.

The price gain over the forecast period will thus stem from underlying fundamental strength rather being driven by investor purchases. The healthy supply/demand backdrop is driven by increasing autocatalyst demand, which we expect to record successive records in each forecast year to exceed 7.5M ounces by 2016, due to the market

dominance of palladium-rich autocatalyst systems and renewed growth in the automotive sector overall, coupled with palladium’s substitution gains at the expense of platinum in diesel. Moreover, we believe that 2013 will see the cessation of palladium supply from Russian government stockpiles and mine supply will also stall. As such, even though the broader climate for investment in precious metals will become increasingly unfriendly in the coming years, palladium’s favourable supply/demand fundamentals should push prices higher, prompting an annual average forecast price of $1,030 in 2016.

It is worth stressing that, despite this growing selling from the investor community over 2013-2016, some of this liquidation will be offset by fresh purchases over the same period, boosted by palladium’s attractive underlying supply/demand fundamentals. This is especially evident when it comes to our projection for palladium ETF holdings in the early part of the forecast. Despite increasing headwinds on the precious metals complex, palladium ETFs have managed to post modest gains year-to-date (a rise of roughly 55,000 ounces through to early october). We expect these positive inflows to continue over the next 12 months or so, as promising prospects for palladium’s industrial demand and a relatively stable price will continue to attract long-term buyers, with the launch of new palladium ETF in South Africa likely to draw additional investor interest. That said, as palladium prices are forecast to show significant gains over 2015-16, we would expect a wave of profit taking to emerge in palladium ETFs, with redemptions projected to reach 500,000 and 300,000 ounces in 2015 and 2016 respectively.

Elsewhere, we remain of the view that retail investment for palladium will remain positive in each year throughout the forecast horizon. At the moment, demand for small palladium bars and coins is expected to remain extremely sluggish over the period, averaging in the region of 58,000 ounces per annum from 2013 to 2016.

NyMEx: PLATINUM ToTAL NET PoSITIoNS NyMEx: PALLADIUM ToTAL NET PoSITIoNS

-10

50

60

Source: Nymex, LPPM

US$/oz

-10

0

10

20

30

40

50

60

Jan-13Jan-11Jan-09Jan-07Jan-05Jan-03

US$/oz

300

600

900

1200

1500

1800

2100

2400

Net

pos

ition

s (c

ontr

acts

, 000

s)

Price

Non-reportable

Non-commercial

Long

Short

-5

0

5

10

15

20

25

30

35

Source: Nymex, LPPM

US$/oz

Jan-13Jan-11Jan-09Jan-07Jan-05Jan-03

US$/oz

100

200

300

400

500

600

700

800

900

Net

pos

ition

s (c

ontr

acts

, 000

s)

PriceNon-reportable

Non-commercial

Long

Short


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