Platinum to follow gold, UBS sees no recovery in jewelry demand

London (Platts)--5Jul2006

Platinum followed gold lower in early European trade Wednesday as players
took some money off the table, and there was also disappointing consumption
news from China, where demand for platinum is most strong, sources said.
Platinum fixed at $1,227/oz Wednesday morning, down $3 on its Tuesday
afternoon fixing in London. Platinum began this week by fixing at $1,243/oz on
Monday morning and has been on a gentle declining trend since. Liquidity has
been lacking with US traders out for their Independence Day holiday, however
their return has left European traders nervous about the immediate direction
of the complex.
"Platinum has been keeping one eye on gold and it has come off in the
last couple of hours," a UK-based trader said, adding: "For the moment it's
taking direction from gold and with gold $10 higher since US traders were
active in the market, people are a little nervous." The trader said that while
the missile tests by North Korea had pushed both gold and, consequently,
platinum higher, it has also contributed to jangled nerves.
"I've spoken with a few people in the market and the general consensus is
that there are two ways that the US could take it. One is that they get a
hissy fit because gold is $10 higher and sell it," he said, adding: "The other
option they have is to say 'get it up then' and they could make a run for
$650/oz and other metals would benefit. But we are a bit nervous."
Meanwhile, the most recent Johnson Matthey report, released in May, told
the industry that platinum take up in China has declined on the back of high
prices, and the latest note from UBS analyst John Reade suggests it has not
recovered.
"Looking at a 10 trading day average, heavy turnover sees 200-300 kg
change hands on a daily basis, but the last 10 days has seen only about 34 kg
trade per day. This is the second lowest turnover seen over the past 18
months. Only in February was turnover slower than current levels. We will
start becoming seriously worried about Chinese platinum demand if volumes do
not start to improve soon, as there is a clear risk that cheaper palladium is
displacing pricey platinum," Reade said.
The London-based analyst suggests that the platinum producers are not
overly concerned, including one source he describes as a "major platinum
producer" who recently suggested to the analyst that while demand for
palladium among jewelers was steady, retail sales had flagged. Reade did not
dismiss this market view, however he commented that "Based on conversations
with the trade, we believe that palladium jewelry is finding a solid niche in
China and that while there certainly were some inventory effects in the past
few years, it seems very implausible that ongoing Chinese palladium stock
building has continued without retail demand taking place."
While autocatalyst use may have attracted the headlines, the real
surprise for the palladium industry has been the appetite for palladium
jewelry in China, without the support of any major marketing drive. Reade is
bold enough to suggest that this may now be denting platinum jewelry demand:
"It is possible that this trend, together with high platinum prices, may be
resulting in a major decline in platinum jewelry demand in China which was
responsible for 875,000 oz of demand (12% of total platinum demand) in 2005,"
he concluded.
James O'Connell, james_oconnell@platts.com

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