- Will platinum prices go as low as during the Global Financial Crisis (GFC)?
- There are quite some similarities…
- …but the two main differences are the global economy and investor positioning
- We expect near-term weakness in prices but not as low as during the GFC
How low can platinum prices go?
Since the emission scandal for hit the news, platinum prices have dropped by more than 6% and palladium prices rallied by more than 6%. This substantial divergence reflects expectations of investors that the platinum demand outlook will be negatively affected and that consumers from now on will favour gasoline cars instead of diesel cars. This week, platinum prices dropped to a low just above USD 900 per ounce. The main question is how low can platinum prices go? Could they drop below the low seen during the Global Financial Crisis of USD 786.5 per ounce? To answer this question we go back to the environment of the Global Financial Crisis (GFC).
What are the similarities between the GFC and now?
During the Global Financial Crisis, the economic outlook deteriorated dramatically pushing major economies into a recession. As a result, demand for commodities that thrive on the well-being of the global economy fell sharply. In the years 2008 and 2009 global platinum demand dropped from 7,969 million ounces to 6,751 million ounces or 18%. In addition, the sharp fall in platinum prices coincided with a sharp fall in oil prices. This affects the platinum outlook in two different ways. First, energy accounts for substantial part of the total costs to mine platinum. So lower energy costs will make mining of platinum cheaper if other costs don’t increase materially. Second, it is likely that lower energy prices provide less of an incentive to consumers to buy diesel cars because driving in general is less costly. Another similarity between the Global Financial Crisis and the current situation is that the US dollar has been strong.
Differences between the GFC and now?
There are also important differences. An important difference is that speculative positioning in platinum was dwarfed by the open speculative positions that existed in July 2014 before the sell-off in platinum had started. In short, the sell-off in platinum prices during the Global Financial Crisis was mainly the result because on expectations of very weak industrial platinum demand. In contrast, since July 2014 platinum price weakness has mainly be the result of investors abandoning the precious metal. Indirectly expectations about the global economy play an important role, but the economic outlook can in no-way be compared with the meltdown in 2008. Since July 2014, investors have liquidated positions that more than exceed the total demand destruction during the Global Financial Crisis.
Will the emission crisis push platinum prices below the 2008 low?
We don’t think so. The global economic outlook in the major economies remains constructive and we are not that negative on China as some investors and analysts are. It is likely that on the short term the emission scandal will weigh on the platinum demand outlook though. At this moment it is unclear how this scandal will evolve further.
We also remain rather positive on other sources of demand. We expect a pick-up in jewellery demand from China. Jewellery demand is as important as autocatalyst demand for the platinum outlook. In addition, we expect other industrial demand to remain positive as well. So total demand excluding investor demand will likely hold up relatively well. However, investor demand could remain negative in the near-term. Even though positions in the futures market have been reduced significantly, positions in ETFs are still substantial. Investors will likely continue to liquidate positions in the wake of a higher US dollar and the emission scandal. If we take all the above into consideration, we expect near-term weakness in platinum prices but not a re-test of the low seen during the global financial crisis. At the most, we expect platinum prices to fall to USD 850 per ounce.