January/February 1994
Precious metal pundits spoke optimistically of prospects for their favorite metals at a recent industry roundtable, suggesting that generally improved fundamentals should keep markets going in the right direction in 1994, despite substantial extra-market concerns.
By Si Wakesberg
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.
The outlook for precious metals is considerably better today than it was a year ago, according to speakers at Scrap Processing and Recycling’s annual precious metal roundtable, held in New York City in December. For example, one industry executive noted at the session that, although there were fluctuations in prices, gold values in 1993 were up 12 percent over 1992 while silver prices rose 20 percent overall. Looking ahead, he and other experts on the panel predicted modestly higher prices for gold, silver, and platinum in 1994.
This cautiously optimistic tone arose in the market summaries despite widely voiced concern about increasing government environmental regulations--which may place new burdens on the precious metal industries--as well as apprehension about political turmoil in some areas, oil prices, the activities of central banks, and other factors that are said to strongly influence precious metal markets today.
Precious Metal Markets Have Bottomed Out
With silver supply down and demand up, a reduction in cold mining and the quantities of gold released by "secondary" sources such as Russia and various central banks, and firming platinum demand. precious metal markets look ripe for price gains, according to Fred Demler, senior vice president of E.D.&F. Man (New York City), who described precious metals as being in a "bottoming-out phase" as 1993 drew to a close.
Among the positive factors influencing his projections, Demler cited strong gains in gold and silver coin demand, improvement in the U.S. economy, the fact that commodity prices are already heading in a positive direction, and unrest in the Commonwealth of Independent States and other parts of the world. Demler also suggested that there has been a subtle positive shift in sentiment among the investment community toward gold, silver, and platinum.
But there are negative factors to contend with as well, he added, pointing to the low rate of inflation, high taxes, a firming dollar, low oil prices, and the availability of alternative investment vehicles.
Adding to the equation is varying demand among key markets. Electronics, for instance, continued to suffer-and consume less gold-in 1992, although industrial fabrications and decorative uses for the metal rose 21.4 percent, noted Donald Walsh, executive vice president of Behr Precious Metals (Rockford, Ill.). In 1993, U.S. gold demand was higher than in 1992, but Western European demand fell, according to Demler, who identified reduced sales by the Commonwealth of Independent States but increased Chinese supply as key market factors last year.
Good demand for jewelry, industrial applications, and coins bode well for the metal in 1994, probably boosting worldwide use by about I percent over the 1993 level, to about 92.4 million troy ounces (t.o.), Demler predicted. Production, meanwhile, which increased modestly in 1993, should continue to expand slowly, except in Canada, where mining cutbacks related to low nickel prices likely will continue to limit output. Demler also projected a sizable drop in gold sales by former Eastern Bloc countries as well as central banks, which he said would sell only 8 million t.o. in 1994, compared with 15 million in 1993. Scrap supplies, meanwhile, should remain fairly steady, following a jump in 1993, he suggested.
"With big jewelry demand in the Middle East, and China the largest jewelry consumer in the world, the support for gold pricing is strong," Walsh added. And Demler, who reported that gold prices in 1993 would end up averaging about $360 per t.o., forecast the metal to see an average price of about $390 in 1994.
For silver, 1992 saw demand exceeding supply for the third straight year, reported Walsh, and Demler projected demand surpluses for 1993 and 1994 as well. Silver mine production fell slightly in 1993, while scrap supplies rose, Demler noted, but demand was relatively weak worldwide, except for strength in U.S. and Mexican coin sales, which should continue to grow in 1994. This year is also expected to see some reduction in supply from such sources as scrap, old coin melt, Indian merchants, and government sales, which should put upward pressure on prices. Demler predicted an average silver price of $4.75 per t.o. in 1994--almost 50 cents higher than the estimated 1993 average.
In discussing platinum demand, Demler painted a somewhat less cheering picture than for gold or silver. Although the metal felt the buoyancy of the U.S. automobile industry in 1993, this major consuming segment suffered through the year in Europe and Japan, where auto business lagged, he reported. Worldwide demand is now increasing, he noted, but large boosts in South African mine production--which grew 18 percent in 1993--easily dwarf this improvement. Scrap supplies, mean-' while, have grown over the last few years and should again in 1994, he predicted. Taking all these ups and downs together, Demler projected an apparent gross platinum surplus of 470,000 t.o. for the year. And even with a good part of that--about 300,000 t.o.--projected for growing investment offtakes, a substantial surplus should remain, he said. Thus, he forecast that platinum is likely to trade at a discount to gold for much of 1994, but placed the year's average price at $390, matching his prediction for gold.
Precious Metals Retain Investment Role
In recent years, there have been major changes in the financial environment affecting precious metals, Scott Copenhaver, director of trade marketing at Commodity Exchange Inc. (New York City), told roundtable attendees during his presentation on investment markets for precious metals. Some of those changes he identified include a growing number of alternative investment options, a climate of slow growth, low inflation, recent major selling by central banks, the changing role of the Commonwealth of Independent States in production--as well as greater information availability about its reserves--and the growing market importance of commodity funds.
Summarizing the 6,000-year history of investment in gold, Copenhaver explained that precious metals have traditionally been used by investors as "protection from inflation." Other valued characteristics of these commodities include their universal acceptance and an impression that they help create economic stability, he added. Because of these attributes, gold in particular will continue to see near-universal acceptance and appeal, he predicted, not only in countries with hyperinflation and restricted access to other means of asset protection, but also in the United States, where there has been a growing acceptance of the precious metal by investors over the past 20 years.
Refiners Face Challenges
"It is estimated that gold in computer circuit boards has been reduced to a fiftieth of prior amounts," Walsh told the roundtable audience, noting the metal has been largely replaced by "tin, palladium, or palladium-nickel alloys, especially in electronic connectors." The result? While gold-and silver-reclamation from circuit boards was once a thriving business, it is negligible today, he said. (He did note, however, that gold holds great prospects in such new products as auto electronics, night-vision lenses, high-tech toothbrushes, bifocal contact lenses, flexible circuits, and electroformed jewelry.)
Add to these kinds of changes other current problems--including fluctuating metal values, lower recovery per unit of scrap, and increasing government regulation both domestically and internationally--and you get some idea of the changes faced by precious metal refiners since the late 1970s, said Walsh.
Focusing on regulatory developments, Walsh warned that "air and water regulations will become more stringent," along with right-to-know requirements and laws covering shipping. In addition, he noted, many states are now carefully inspecting precious metal refineries-and this and other environmental controls will have a major impact on the future of the industry.
On the bright side, Walsh said that precious metal recycling will continue to increase-partially in response to concern over hazardous wastes.
Examining changes on the international scene, Walsh discussed the potential impact of the North American Free Trade Agreement, a new ISO 9000-related program being developed in Norway to establish worldwide environmental standards for recyclers, Germany's "take-back" program--which he called "an economic nightmare”--and the Basel Convention on the Control of Transboundary Movement of Hazardous and Other Wastes.
Basel Threatens
Following up on Walsh's concerns, John C. Bullock, environmental counsel to Handy & Harman (Waterbury, Conn.), said the Basel Convention, which creates a complex and rigorous control system for transboundary movements of hazardous waste," will have a telling effect on shipments of precious metals. The trouble with Basel is that the convention defines waste to cover all kinds of recyclables. "It deems materials intended for recycling to be 'hazardous waste,' if they have 'hazardous constituents,' such as copper, zinc, arsenic, cadmium, or lead, or hazardous characteristics not uncommonly found in many industrial materials, including precious metal-bearing recyclable material," Bullock said, and the agreement applies the same rules to all these materials whether they are headed for recycling or disposal. He emphasized, however, that most international trade in secondary precious metals is not likely to be imperiled by the convention, thanks to an agreement among the member countries of the Organization of Economic Cooperation and Development that would establish procedures to streamline regulation of shipments of recyclables.
Bullock noted that many parties to the convention "are not fully aware of the economic effects" of the agreement. Thus, he urged U.S. precious metal businesses to monitor developments concerning Basel and raise their concerns with their legislators, noting that Congress is likely to move toward ratification of the treaty--and develop implementation language--during 1994, despite the fact that the Senate in particular does not appear to view the agreement as a high-priority issue.
Catalytic Converters--Quite a Squeeze
Between 8 million and 8.5 million catalytic converters will end up having been recycled in 1993-approximating the same number as total sales of new automobiles in the United States, said John Calpakis, president of Converter Technology Inc. (Houston). As a result, the industry is expected to end the year having reclaimed 225,000 to 250,000 t.o. of platinum, 70,000 to 90,000 t.o. of palladium, and 20,000 to 30,000 t.o. of rhodium, he reported. While mine ores yield less than a half-ounce of platinum-group metals per ton of ore, Calpakis noted that converter scrap generates about 25 to 30 t.o. of platinum-group metals per ton of catalyst. And in the next five to seven years, he estimated, that yield will rise to about 40 t.o. per ton.
"Although the catalyst removed from the converter by collectors is sold to refiners on an assay basis, all collectors purchase auto catalytic converters on flat prices and assume the risk between such flat prices and final assays," Calpakis explained, describing the resulting "profit squeeze" that leaves little margin for error while "limiting upside profit potential and significantly increasing downside risk." This pricing practice leaves only a thin 4 to 5 percent for decanning, shipping, interest expense, and profit, he said. Further, market fluctuations in platinum, palladium, and rhodium prices add a "large speculative dimension" to purchasing catalytic converters for collectors and processors, he said, though noting these risks can be limited through hedging.•
Precious metal pundits spoke optimistically of prospects for their favorite metals at a recent industry roundtable, suggesting that generally improved fundamentals should keep markets going in the right direction in 1994, despite substantial extra-market concerns.