It happens to all commodities. At one time or another, China falls in love with you and barring a drought or striking miners somewhere, your price becomes dependent on Chinese mood swings.
It's happened with soybeans and iron ore, oil and copper. Now it's platinum's turn, ETF Securities' Director of Research Mike McGlone said this past week in a research report for clients.
Platinum is one of the world's rarest metals, with a wide variety of uses. It is well known that platinum is heavily used in the manufacture of auto catalysts for use in the diesel vehicles that dominate the European vehicle market. Tightening global emission standards have caused a structural upward shift in demand for these auto catalysts and the platinum used in them. Less well known, however, is that the largest single source of platinum demand over the past few years has been jewelry – and nearly all of that demand stems from the Chinese.
Prior to the recession in Europe, European auto catalysts accounted for the single largest demand component for platinum. At the demand peaks in 2006 and 2007, European platinum demand from the auto makers totaled around 2 million ounces annually, roughly double the demand from Chinese jewelry. But by 2012, Chinese platinum jewelry demand increased 16% to just under 2 million ounces and European demand for auto catalysts declined to 1.3 million.
As Europe emerges from its crisis, auto catalyst demand for platinum is likely to rebound, but Chinese platinum jewelry demand this year is already on pace to surpass the peak demand from European auto catalysts, which occurred in 2006-07. Moreover, more Chinese are wedding platinum wedding bands than ever before, pushing sales above and beyond the previous record for Chinese platinum jewelry sales of 2.08 million ounces in 2009, according to the ETF Securities report.
The Platinum Guild International began marketing the precious metal in China 15 years ago. Demand for platinum in China has surged ever since, especially among urban women. Prior to 2008, platinum was trading about double the price of gold. Today, Platinum futures for the nearby Dec. contract are $740.08 per ounce, up $2.55 in Friday's trade, but still much cheaper than gold.
No surprise. Chinese platinum jewelry demand bigger than Japan, North America and European demand combined.
Precious metals access in modern communist China has evolved from an almost illegal status to one that is actively encouraged by the state. In 2004, China classified precious metals as an investment, prompting people to buy gold. In 2009, the Chinese government began a concerted effort to promote precious metals ownership, running programs and advertisements on China's Central Television on how to purchase precious metals. Gold ATM machines popped up in major cities.
Besides investment interest in precious metals, Chinese jewelry demand has provided good support to the platinum market as lower prices appear to have attracted strong demand, said McGlone.
A good proxy for Chinese platinum jewelry demand is the volume of platinum futures traded on the Shanghai Gold Exchange. Average daily platinum volume on the exchange in 2013 is running near 45% above 2012 levels, recently reaching a new record high this year.
Another indicator of Chinese platinum jewelry demand is China platinum imports. The latest data on China platinum imports for September showed the highest level since March 2011 at 10.5 million kilograms (or approximately 338,300 ounces).
The world's total demand for platinum has been stagnant around 8 million ounces a year since 2005, with the exception of the recession year in 2009 when demand dipped to 6.8 million ounces. In 2007, total jewelry demand accounted for about 26% of platinum demand worldwide compared to 51% for automotive catalysts. But now in 2013, total jewelry demand is on track to account for over 32% of total platinum demand compared to about 39% for auto catalysts. And China will likely account for nearly 80% of all platinum jewelry demand before this year is out, compared to just 40% in 2000, according to ETF Securities.
China is now the largest single market in the world for platinum jewelry. China's demand for platinum jewelry has increased as the platinum price has declined and as disposable incomes rise. Looking ahead, Chinese platinum jewelry sales are likely to continue to rise. Central to this will be China's ongoing economic progress and the accumulation of personal wealth, said McGlone.
"In our view, as China per capita incomes continue to grow, the demand for jewelry should also rise," McGlone wrote in a report published on Oct. 29. "Based on our expectation of continued supply constraints in South Africa and improving economic conditions in China and Europe, we remain bullish on platinum futures."
ETF Securities runs the thinly traded physical platinum exchange traded fund (PPLT). Over the last three months, it's traded close in line with State Street's SPDR Gold (GLD) ETF. Both are underperforming the iShares Silver Trust (SLV) ETF, however. Further out, all three of those metals have suffered in the last 12 months. Platinum has suffered less. PPLT is down 6.45%, while GLD is down 21.92% and SLV is down 29.62% over the last year.