Analysis:Japan quake opens buying window for platinum, palladium

By Chikako Mogi and Rujun Shen

SINGAPORE/TOKYO (Reuters) – Japan’s earthquake has opened a brief window of opportunity for consumers and investors to stock up on platinum and palladium after demand from automakers crashed in the wake of the catastrophe, slicing as much as 10 percent off prices.

The market has already started to recover as weaker demand from Japan is quickly being offset as consumers ramp up component output in other countries.

The nation’s industrial demand for platinum was around 745,000 ounces, Johnson Matthey said in a recent report, and demand for palladium was 1.37 million ounces in 2010. Autocatalysts account for more than half of that.

Platinum group metals are used to make catalytic converters to cut vehicle emissions, electronics, and pressure sensitive adhesive on Post-it notes.

“The Japan quake impact is bearish for the PGM markets in the near term, but bullish over the long term,” said Naohiro Niimura, a partner at Tokyo-based research and consulting firm Market Risk Advisory Co.

“The global economy is not as vulnerable and there will be companies willing to supply parts that Japan can’t, which will likely also prompt Japanese firms to strive for an early recovery in production,” he said.

“So, I am keeping a bullish outlook on PGMs unchanged.”

Spot platinum sank to $1,654 an ounce on March 17, losing 8 percent from before the massive earthquake and tsunami struck Japan on March 11. It traded at $1,743.50 by 0652 GMT, still below the closing price of $1,762 on March 10. Spot palladium slid over 10 percent to a 3-month low of $684.50 in the week following the quake, before recovering to $748 on Friday.

Japan’s total consumption, including jewelry and investment demand, was 1.16 million ounces, or 36 tonnes of platinum and 1.47 million ounces, or 46 tonnes of palladium — 19 and 21 percent of global mine output in 2010.

In 2009, total demand for platinum was 1.05 million ounces while palladium was 1.3 million ounces.

Demand for the metals is bound to go up as Japan’s automakers slowly resume production following the quake.

SUPPLY CHAIN CRITICAL

Toyota Motor Corp (7203.T: Quote, Profile, Research) plans to restart production of three hybrid models on March 28, after closing all 18 factories following the quake.

With the other vehicle makers, including Nissan Motor Co (7201.T: Quote, Profile, Research) and Honda Motor Co (7267.T: Quote, Profile, Research), suspending operations, Japan is expected to have incurred a production loss of 335,000 units of light vehicles by end of March 25, research firm IHS Global Insight said.

An average of four to five grams of platinum group metals goes into an autocatalyst, but the quantity varies depending on the size and type of the engine as well as the market.

“It’s very conceivable that some makers could start production and would have to suspend production again if parts are not available,” said Christopher Richter, an auto analyst at CLSA Asia-Pacific Markets.

“When will the industry get to a normal footing? We could be looking at a period of some weeks, or maybe even a month or two. It’s very uncertain.”

The earthquake and tsunami, which left thousands of people dead and missing, destroyed key infrastructure and fueled concerns of a nuclear crisis, disrupting global supply chains of parts for the cars and electronic goods Japan makes.

The longer-term outlook for the group of metals remains positive as Japan rebuilds shattered towns and people replace items lost to the disaster.

Among the buyers who took the opportunity of lower prices are end-users, jewellers as well as investors.

“There has been physical buying after prices dipped, from China and other countries,” said Dick Poon, manager of precious metals at Heraeus in Hong Kong. “It’s providing support to prices, though the volume isn’t substantial.”

PREMIUMS POSITIVE

Those buyers include Chinese autocatalyst makers, which consumed 930,000 ounces of palladium, about 18 percent of global demand, according to the Platinum 2010 Interim Report by Johnson Matthey.

Poon said premiums for platinum and palladium in Hong Kong rose to $2 an ounce over London spot prices, from $1.50 before the earthquake, suggesting demand for the physical metal is rising.

“Once palladium prices went below $700, Chinese buyers went in. It would be a shame if they let the chance go by,” said a China-based trader of platinum group metals.

“A rebound in Japan’s demand will take some time, while China’s auto industry is expected to continue its robust growth, supporting prices of these metals in the medium term.”

Japan accounted for roughly 30 percent of global automobile output and is a major consumer of platinum jewelry.

While estimates of lost demand for platinum and palladium due to the quake is unclear, traders said both markets appear to have found support, after speculative positions were largely cleared in the post-quake turmoil.

In the week to March 15, speculators shed their long positions in platinum by 19 percent and in palladium by 16 percent, data from the Commodity Futures Trading Commission shows.

The closing of such long positions has led to a sharp plunge in platinum price below $1,700 and palladium falling below $700.

“I don’t think platinum will fall sharply from here as it is near the production costs,” said Yuichi Ikemizu, Tokyo branch manager for Standard Bank.

(Editing by Clarence Fernandez and Nick Trevethan)

Analysis:Japan quake opens buying window for platinum, palladium