Master of Science (MSc) in Management

International Economics

G1 Group 5
Chung Pei-lan
Jonathan James Seah Junhao
Piyush Baid
Yasmin Beevi Binte Abdul Hadhi
Zhou Yanru

Group Project
Commodity Price Forecast Platinum
Instructor: Larry Haverkamp

Platinum Price Forecast

For Date:
No.

As Of

1
2
3
4
5
6
7
8

09/26/16
09/19/16
09/14/16
09/07/16
09/07/16
09/06/16
08/24/16
08/22/16

08/19/16

10
11
12
13
14

08/18/16
08/17/16
08/09/16
07/15/16
07/12/16

15

07/08/16

16
17
18

06/30/16
06/30/16
04/28/16

19

02/23/15

Organisation
Landesbank Baden-Wuerttemberg
Commerzbank AG
Intesa Sanpaolo SpA
Societe Generale SA
Emirates NBD PJSC
ABN AMRO Bank NV
Citigroup Inc
Natixis SA
Australia & New Zealand Banking
Group Lt
RBC Capital Markets
Bank of America Merrill Lynch
ING Bank NV
Capital Economics Ltd
BMO Capital Markets Corp/Toronto
Mitsubishi Corp International Europe
PLC
Oversea-Chinese Banking Corp Ltd
Toronto-Dominion Bank/Toronto
Standard Chartered Bank
Australia & New Zealand Banking

20
01/14/15
21
01/12/15
Mean
Median
Standard Deviation

Group Lt
Numis Securities Ltd
UBS Ltd

31 Dec 2016 (in

USD/oz t)
1050
1050
1100
1154
950
1100
1150
1250
1150
1000
1150
1080
1040
1000
1080
1227
1050
1115
1540
1377
1500
1148.23
1100
155.75

Introduction
Platinum is a natural metal which comes from the Earth's crust. Being one
of the rare elements, it is very scarce and only a few hundred tonnes are
produced yearly. It is one of the least reactive metals, translating to very strong
resistance to corrosion, even at high temperatures. In general, platinum is best
known for its use in jewelry. However, from 2015 statistics (Table 1), only 35% of
platinum was used in the production of jewelry, while 62% was used in
automotive, chemical and other industries. Up to 42% of total demand can come
from the automotive industry. Here, platinum is used as a catalytic converter
which can transform toxic emissions into less harmful waste, thus making it an
indispensable material in the industry. With the growing governmental focus on
the environment, the role of platinum is all the more underscored. The metal is
also used in the production of laboratory equipment, electrical contacts, and
electrodes, platinum resistance thermometers, dentistry equipment and lastly, as
investment. A visual representation of the demand breakdown can be found in
the Appends (Figure 1).
Its production is concentrated mainly in South Africa, with the nation
accounting for 73% of the total supply (Table 2). Russia is the second largest
producer. Therefore, economic and political occurrences in any of these countries
could have significant implications for world supply of the commodity.
Considering the demand and supply factors, platinum is a metal worthy of
investigation. One could even argue that it has become a necessity of sorts.
Further, due to South Africa having the lions share of supply, we can make the
case for it being simpler to predict prices. However, demand for precious metals
is less transparent and greatly influenced by exchange rate too, which usually
leads to greater price volatility. Platinum, being both a precious and industrial
metal, is therefore subjected to many of these factors. As such, there is room for
us to analyze data and speculate on the platinum market.

Analysis
With the data collected, we have observed an overall increasing trend in the
price of platinum (Figure 2). For 3Q 2016, the median price is expected to be
USD $1,060 per troy ounce. The troy ounce is a unit measure used to
measure the weight of precious metals. One troy ounce is defined as exactly
31.1034768 grams. The figure goes up to USD $1,100 per troy ounce for

4Q2016. The median price is then expected to stay constant until 3Q2017,
where it increases further to USD $1,150 per troy ounce. Below, we attempt
to identify factors contributing to the aforementioned forecasted price
increase for the metal.
First we will look at demand-side factors. Top on the list would be the global
automotive demand. With the advent of green technology and electric cars,
vehicle manufacturers could essentially do away with the need for platinum in
their production processes. However, that scenario is still a few decades away
at least. For now, the metal is still essential in the manufacturing process,
thus making platinum a complementary good. The Volkswagen scandal in
2015 caused prices to plummet to a six-and-a-half year low as investors
abandoned the metal, thus showing how responsive platinum demand is to
automotive demand. The forecasted increase in world vehicle production and
the higher platinum loadings on vehicles, due to the emphasis on clean
technology, would therefore translate to higher platinum prices in the short
run.

Platinum demand is also tied to jewelry demand in China particularly, and

India to a certain extent. While gold has been the traditional metal of choice
in both these markets, platinum has established a niche brand market for
itself over the last decade, more so in China than India. Chinese consumers
also tend to be more sensitive to prices, often buying more as prices increase.
Platinum is both a symbol of prestige and an investment, hence this buying
behaviour. This could explain the continued increase in price forecasted for
the commodity.
Lastly, we will look at investment demand for platinum. The forecasted
increase in prices could be because some banks and investment firms,
particularly in Asia, have recently signaled their interest in precious metals to
hedge against market volatility. In cities like China, where the currency is
weaker and more unstable, people like to buy precious metals to keep instead
of having cash in the bank. This is for protection against inflation that may
happen at any time. The same thing happened when Britain announced their
exit from the European Union. The value of the pound fell and many rushed to
buy precious metals for fear of their currency dropping even further. Gold and
platinum are generally stable in terms of value and may even appreciate in
future given their scarcity. Platinum supply is tighter than gold, thus platinum
prices are affected to a greater degree.

 As for supply-side factors, the main thing would be what is termed The South
Africa Effect. With the country controlling most of the production, trends
there are likely to have major impacts on the global price for the metal. Mine
supply has shown no overall growth in recent years, but the nation has had
issues with mining strikes in the past. This exacerbates the market deficit for
platinum, and surely puts upward pressure on prices. Current wage
negotiations could lead to strikes again in the near future, and output could
fall more than expected this year. The upward trend in prices will then be
validated.

However, there is also a secondary supply for platinum - recycling. While the
market for recycled platinum seems to be expanding, due to again, the higher
volumes of vehicles being scrapped, it will not be enough to offset the earliermentioned deficit.

Conclusion
Overall, with the combined increasing demand for platinum and the likely
slowing down of supply, the forecasted increase in prices seems plausible,
notwithstanding any sudden economic events in the near future. It is tough for
platinum to surge in prices, but the foundations for long-term appreciation are in
place. Platinum was at its peak of USD $2,100 per troy ounce in 2007 but fell to
USD $800 per troy ounce in 2008, due to the financial crisis. It then rose to USD
$1,800 per troy ounce in 2011 and as of early 2016, has been on the rise (Figure
3). This upward trend is likely to continue. From the data, we can see the price
range of the metal over the years. There is no doubt that platinum will one day
hit its peak again. As long as central governments keep pumping money into
global equity and bond markets, investors will flock to gold and platinum for
inflation protection. From our research and analysis of all the various sources, we
expect prices to rise; the average platinum price forecast for 1Q2017 came in at
USD $1,100 per troy ounce and that is our forecast as well. At time of writing
(September 2016), the price of the metal stands at USD $1,028 per troy ounce.

Appendix

Figure 1: Demand segments for platinum

Figure 2: Curve analysis of platinum price forecast

Figure 3: Platinum price trend over the years

Demand

Year 2015 (koz)

% of Total

Demand
Automotive
Autocatalyst
Non-road
Jewellery
Industrial
Chemical
Petroleum
Electrical
Glass
Medical and
Biomedical
Others

3,405
3,260
145
2,880
1,650
595
160
170
200

Total
Demand

35%
20%

230
295
305

Investment
Change in
Bars, Coins
Change in
ETF
Holdings
Change in
Stocks Held
by
Exchanges

41%

4%

525
-240

20

8,240
Table 1: Demand of platinum in year 2015
Year 2015
(koz)

Supply
Refined
Production

100%

% of Total
Supply
6,150

South
Africa
Zimbabwe
North
America
Russia
Others
Producer
Inventory

4,465
405
385
715
180
45

Total Mining
Supply
Recycling

6,195
1,710
Autocataly
st
Jewellery
Industrial

1,190
515
5

78%
22%

Total Supply
7,905
Table 2: Supply of platinum in year 2015

100%

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