Everyone here today is either involved in the platinum jewelry business or is considering adding platinum to their line. The objective of this paper is to give you a better understanding of the factors that affect the platinum price.

Platinum Supply
The two fundamental factors affecting the market and ultimately the platinum price are supply and demand.  South Africa is the largest supplier of platinum in the world. Russia is the second largest.  Of the total supply of 4.9 million ounces in 1997, South Africa supplied 70%, while Russia supplied 15%, and the remaining 9% was supplied by North America and several different countries.

There is an important difference between South African and Russian mines.  The South African mines are platinum mines. That is, they mine primarily for platinum. They also produce the other platinum group metals, plus cobalt and nickel, but all as byproducts. In stark contrast the Russian mines are primarily nickel mines and the platinum group metals are byproducts.

Platinum Demand
In 1997, total world demand for platinum was 5.09 million ounces.  Japan used 37% of the world demand. North America accounted for 26% of the total demand. Europe accounted for 16% of the market and the rest of the world used 21%.

To discuss platinum demand by application I have broken the market into four sectors.  Demand from the four sectors was split as follows:

Jewelry: 41%
Autocatalyst:  28%
Industrial:  25%
Investment:  6%

Jewelry was the major application for platinum in 1997, using over 2 million ounces. The U.S. market is, along with China, the fastest growing market for platinum jewelry in the world. Since 1991, the market here has grown seven fold.  I firmly believe that the fundamentals of supply and demand determine the price of any metal over the long term.  There are however, many factors that influence the supply/demand equilibrium and prompt people or companies to become either buyers or sellers of the metal.  These factors can have an important bearing on the price in the short to medium term.


Factors Affecting Supply
Given the relative instability of the major platinum producing countries, Russia and South Africa, labor unrest is always a concern. Technical problems at the mines will also disrupt supply. Due to the geographical location of the major producers, any distribution problems will adversely affect supply.

Details of a new platinum mine or the expansion of an existing mine will affect market sentiment.  Mine closures or decisions to halt expansion plans will affect the market.  Bureaucratic or administrative problems can also lead to a disruption in supply. Economic difficulties in South Africa or Russia can lead to changes in supply.

Factors Affecting Demand
The introduction of new applications for platinum will impact demand.  An example of this is the catalytic converter.  It is only in the past 20 years that this has become a major demand sector for platinum.  Legislation can influence platinum demand. For example, the introduction of legislation in many countries has made it mandatory for all new cars to be fitted with catalytic converters. The substitution of platinum by other metals will adversely affect demand for platinum.  In certain applications where durability and high performance are essential, substitution can work to bolster platinum demand. Economic activity will play a major role in determining demand.  Platinum is used in the manufacture of one—fifth of all household items. Therefore, strong economic growth leads to increased demand for platinum.

News of future demand will also affect the platinum market and the price.  And finally, promotional activity can play a vital role in boosting demand.

Other Factors Influencing the Platinum Price
There are many other factors that can affect the price of platinum.  The platinum price will often move due solely to movements in the prices of other precious metals, in particular gold.  Platinum is a dollar commodity. As a result, currency fluctuations can affect demand for the metal. The build up or depletion of stock piles will affect supply and demand and thus the platinum price.

Platinum is a strategic metal and the outbreak or even threat of war can have a severe impact on both the supply and demand of the metal. This can have major repercussions on the price.  Although a difficult factor to quantify, sentiment plays a role in moving the platinum price. Sentiment is described in the dictionary as "The tendency to be swayed by feeling rather than reason." A good analogy is the stock market, which has days when it moves up or down for no apparent reason.

Speculation and investment will affect the price. Although less visible in recent years, inflation or inflationary concerns can result in money moving into hard assets, e.g. gold, platinum, or other precious metals.

Lease Rates
The lease rate is the cost of borrowing platinum and it is expressed as a percentage.  The duration of a lease generally varies from one month to one year. Why do some companies lease platinum? One answer lies in the application for the metal. Some applications are more suited to leasing than others.  For example, in the petroleum industry, platinum is required as a catalyst for chemical reactions. By its very nature a catalyst is not used up in the reaction.  As a result, the platinum will always be available to the petroleum company.  It can decide to buy the metal or it may consider leasing it. When lease rates were less than money interest rates, it was prudent for these companies to consider the option of leasing. This scenario is not applicable to the jewelry or autocatalyst business. Both the car companies and jewelers sell a product which contains the metal. To do this they must own the metal in the first place. The platinum price is ultimately determined by supply and demand or more specifically, the balance between buyers and sellers.  The lease rate works along similar lines. In this case it is the balance between those wanting to borrow metal and those willing to lend metal.

Iridium and Ruthenium
In the U.S. jewelry industry platinum is most commonly alloyed with iridium or ruthenium.  Supply and demand for these two metals are significantly smaller than for platinum, and as a result, changes in the equilibrium can result in major movements in the price.

Conclusion
Generally there are many factors influencing the price at any one time.  As a result, it is very difficult to forecast future prices.  As Mark Twain said, "The only thing certain about predictions is that they will be wrong."  My own view is that if you purchase the metal on a consistent or regular basis, over the long term you will get the average market price.
 

V4N1

Factors Affecting the Platinum Market
John Cullen
Johnson Matthey

This is an abbreviated version of the original work. For full technical details, please consult the original paper.