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platinum frenzy grips china

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    from www.commodityonline.com:

    Precious Metals: Platinum frenzy grips China
    December 22, 2009 17:15:00

    BEIJING (Commodity Online): Platinum jewellery ornaments are making big waves across China. Sales of platinum jewellery have risen dramatically in the dragon country, prompting precious metals analysts to predict that platinum will outperform gold in China.

    What is driving platinum in China? Here is an extract from a report from BNP Paribas Fortis Metals Monthly - December 2009, on Chinas rising thirst for platinum. Read it below:

    China's demand for platinum has been exceptional in the last 12 months. In November the UK-based refiner Johnson Matthey (JM) suggested that total demand (from all sources) of platinum in China in 2009 would be 2 Moz, 66% higher than 2008. On the Shanghai Gold Exchange, the cumulative total of platinum contracts traded in ounces (having halved the total to remove double-counting) was 838,299 oz, far in advance of the previous highest level at this stage of 2008, when it was 632, 952 oz.

    After a rather subdued first nine months of 2008, on the back of the extremely high platinum price and restricted supply (due to the power crisis in South Africa), Chinas demand really took off in September 2009 as the price crashed, and has remained strong ever since. It dipped in June this year but has slowly recovered. October data is only available for direct China imports, and this shows these falling back to 79,048 oz, the lowest since December 2008. In total, these add up to 1.7 Moz in 2008 (of which nearly 900,000 oz came in the last three months) and 2.3 Moz in 2009, up to the end of September. Even if imports were to slow to a rate of 150,000 oz a month for the last three months of 2009, that would still imply 2.75 Moz for the full year. Its possible that some of this data is less than totally reliable Swiss exports to China do not always tally with recorded Chinese imports from Switzerland, for example but the trends are clear.

    Clearly it is not an exact science as to how much platinum goes to one use or another. However, jewellery manufacturing is going to be the major platinum user in China. Primarily this is because the Chinese automotive industry tends to make gasoline-powered cars, and so the split between platinum (normally found in diesel-engine autocatalysts) and palladium is heavily in favour of the cheaper metal. The next largest use typically is glass manufacturing, followed by the chemical and electronics industries. These contribute a fair chunk to China's consumption, but even if they have been underestimated it is still the case that jewellery demand must have increased substantially over 2008. It is possible that the high levels of jewellery demand might to some extent be masking investment in platinum, but it is impossible to know in what quantities this might be happening.

    What has brought about this large increase in platinum consumption in China? The most obvious factor is the sharp decline in the platinum price. We have discussed before the notion of the jewellery market being platinum's "shock absorber", i.e. that the price elasticity of demand for platinum jewellery is higher than for other enduses, which means that jewellery demand contracts or expands when prices are high or low, and in doing so minimises the necessary price movements.

    This seems to be what has happened. When platinum prices rose sharply in H1 2008, due to the South African power crisis that started at the end of January that year, turnover on the SGE fell, reaching its lowest in the three months to September 2008.

    Similarly, imports dipped sharply, bottoming out in June 2008 at a net 40,000 oz. Then, as the price collapsed in Q3 2008, both imports and SGE trading soared. Both dipped again as the price recovered in Q1 2009, but then - and this cannot be explained by movements in the price - both recovered again in Q2 2009. However, both are now stuttering as the platinum price once again flirts with $1,500/oz.

    Another factor in this scenario has been China's economic success. Although this surely plays second fiddle to price, as the rockiest part of China's recent economic history was Q4 2008, when platinum imports surged, the surge in demand throughout 2009 we see as closely related to the renewed buoyancy in the economy.

    This has been helped by a massive government stimulus and plentiful liquidity. In part, too, the strong demand derives from a need by jewellers to restock after allowing levels to fall when platinum prices were very high in H1 2008, and also generous profit margins, as the retail price was not reduced as much as the wholesale price. Demand however has already slackened.

    Can this tremendous level of offtake be maintained? In short, no. We can be confident in saying this, because it has already weakened. On JM's figures, about 1 Moz of jewellery was bought in H1 2009, but they predict just 0.7 Moz will be purchased in H2 2009.

    Furthermore, looking at their monthly data and the similar Hong Kong imports, it looks as if this estimate is biased towards Q3 rather than Q4, implying demand of some 300,000 oz in Q4 2009. At an annual rate this is 1.2 Moz. We see this as a more likely level of demand going forward than the much higher figure seen in 2009, as prices are higher and jewellers have less need to restock. But 1.2 Moz would still be a solid performance, and stronger than in any year since 2003.

    Are higher prices therefore likely to bring down the demand for platinum? Insofar as all precious metals are trading at very high prices, in particular gold and silver, there seems little risk of substitution of other precious metals for platinum. But consumers have other options than jewellery, and if platinum prices continue to rise, offtake for jewellery is likely to be hit.

    For the platinum market this wouldn't matter too much - in fact it is exactly what a 'shock absorber' is meant to do. What could be more troubling, at least for those looking for higher prices, is if China's economy stumbles. That would mean lower demand at all price levels, and would in turn force the platinum price lower.

    However, we remain long-term China bulls and therefore see the risk of this as relatively slight. Platinum, as a consumer-demanded metal, is probably more insulated than industrial metals, simply because over the medium-term Chinese consumer spending is likely to rise as a share of GDP
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