http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=91221&sn=Detail

Scotia describes the falls in the platinum group metals prices last year as a "reality check", but argues that the steady rebound across the sector is fundamentally justified and looks to be sustainable. ETF buying is expected to remain strong for as long as the fundamentals remain bullish. The implication is that this will be for at least the next year, with industrial demand for all metals expected to start recovering slowly, but with momentum building over the course of next year.

Rhodium demand, which is reliant as to more than 80% on auto demand, is expected to suffer heavily in 2009, and supply is projected to overhang the market for a period, especially as new production coming on stream is expected to involve properties with comparatively high-grade rhodium content. The price will pick up; however, as demand recovery becomes widespread - and the concentration of production in South Africa means that the price risk lies to the upside.

As far as platinum is concerned, increasing demand is likely to be bolstered by restocking activity when confidence starts to recover, notably within the automotive sector, although the European industry is expected to dip in the wake of the cash for clunkers scheme.

China remains the bright spot in the auto sector (and elsewhere), aided by government incentives, although the bank suggests that this burgeoning in demand was likely to happen anyway because of the high rate of growth in demand for vehicles before the economic slowdown developed; this is compounded by the large pool of potential first time buyers on the horizon.

Other industrial uses are also likely to recover well, especially in the glass sector which will benefit from the dual recovery in consumer spending (flat screen TVs, for example) and increased computer sales as industry starts hiring once more.

Although over the longer term the platinum jewellery sector has registered a price-elastic decline, Scotia points out that despite the recession, platinum jewellery has held up well in the face of the drop in gold jewellery demand; this is a result of strong growth in China, a steady performance in Europe, with a fall in the US and a sharp drop in Japan.

The bank notes that after the sell-off in the platinum ETFs in the second half of 2008, buying has picked up smartly and accelerated since this past August, a feature that is ascribed to fresh dollar weakness and "perhaps" on concerns that the equity rally might be close to running its course. Looking ahead the bank suggests that investor interest should be sustained by the promising medium -term outlook for the metal and that if PGM ETFs are launched in the US then the amount of metal held in these funds could rise by an order of magnitude. The market does need to remain aware, however, that these ETFs are highly liquid and that a heavy spell of redemptions could prompt a significant fall in price. This possibility is, though, not given a high probability, given the outlook for a recovery in industrial demand and the degree to which industrial users have run down their inventories.

The very high speculative long position on NYMEX is ascribed in part to the possible launch of PGM ETFs in the US. Noting that silver experienced the same thing twice - once ahead of the delayed launch and then the actual launch of the silver ETF in the US, Scotia suggest that the net long platinum position on NYMEX may well deflate if the ETF is given the nod - and possibly fall even more rapidly if it is refused.

Scotia notes that the accumulation of metal in the palladium ETFs has been steady, with few redemptions and suggests that the structural deficit in the market, sustained but finite stockpile sales from Russia and a good long-term, outlook for the metal should all point to further steady accumulation. Similar arguments apply to palladium as they do to platinum with respect to the net speculative long position on NYMEX, although any sell-off from the speculative position is not expected to generate much of a price pull-back.

The bank suggests that the short term potential for a retreat across all markets would be likely to affect palladium also. It goes on to note that there are some potentially" very bullish developments, but these are lodged in the longer term, beyond 2010. In line with platinum, ScotiaMoccatta expects the outlook for palladium to improve once a sustainable recovery is underway. One point of interest is that while the recession is expected to see palladium demand continue to decline, the autocatalyst sector should recover well as the regions expected to experience the strongest improvements are the BRIC countries, which tend to use petrol-driven vehicles rather than diesel. (It should perhaps be noted here that the only region that boasts high diesel penetration is Europe, where diesel accounts for roughly 50% of vehicle demand).

The bank notes how palladium jewellery, akin to its silver counterpart, has fared better than gold jewellery demand by virtue of its lower price, which has appealed to consumers as well as offering better margins to fabricators. The market is not yet mature and offers further growth potential in Europe and North America. It does, however, suffer to a degree in Asia, where fabricators' efforts to bolster margins mean that consumers do not receive perceived value on the return of pieces for scrap. As a consequence, palladium jewellery, unlike gold, is not seen as an investment. In a warning shot to the industry, the bank suggest that as consumers become accustomed to palladium, fabricators are "likely to have to cut their margins, or lose sales".