Demand for platinum jewelry fell in 2005; Palladium is white hot in China

Jewelry demand for platinum fell for the third consecutive year in 2005, a direct result of its rising price, according to precious metal refiner Johnson Matthey. Meanwhile, palladium for the manufacture of jewelry is enjoying huge gains in China.

In its annual report on the platinum market titled, Platinum 2006, released Monday, JM said that purchases of platinum for the manufacture of jewelry fell by nine percent to 1.96 million ounces, the first time since the mid-1990s that demand fell below 2 million ounces. The largest decline was seen in China, but demand also fell significantly in North America and Japan, and to a lesser extent in other regions of the world. The exception is the luxury market where platinum jewelry sales have remained firm.

The high cost of maintaining inventories of platinum jewelry led wholesalers to increase the volume of older pieces being recycled to manufacturers, said Ellen Zadoff, JM’s North America market research manager, who presented the report during a briefing in New York.

Demand for platinum from the North America jewelry sector fell by 5 percent to 275,000 ounces. The luxury market fared well but the fashion and bridal markets were hit by increased competition from the less expensive white gold.

Chinese jewelry demand for the precious metal fell by 13 percent in 2005 to 875,000 ounces in 2005, greater than JM forecasted, as price concerns led to increased competition from white gold and palladium. Zadoff said that it appeared that the drop in jewelry demand happened once the price of platinum hit $1,040 an ounce. Wholesalers and retailers cut their inventories, which increased the decline.

“China is basically making (platinum) jewelry to order,” Zadoff said. “If you can’t stock it, you can’t supply it to consumers.”

Another factor that contributed to its decline in China was that 2005 was considered to be an inauspicious year to get married, and sales of bridal jewelry throughout China dropped for the year.

“Retail sales in China have definitely been wounded, but it hasn’t been killed,” Zadoff said.

Purchases of platinum by Japanese jewelry manufacturers fell by 50,000 ounces (9 percent) to 510,000 ounces in 1995 because of its rising price and increased competition from white gold. Zadoff explained that consumers in Japan were reselling much of their platinum jewelry.

European jewelry demand, among the lowest of the major markets, remained stable at 195,000 ounces in 2005.

To highlight platinum’s decline in jewelry use, Zadoff said that jewelry accounts for 30 percent of total platinum demand in 2005. In 1996, jewelry accounted for 40 percent of total demand. Platinum also has a number of automotive and industrial applications, particularly in the manufacturing of autocatalysts for automobiles.

The outlook for platinum demand in jewelry is mixed, JM said in its report. Affluent customers will continue to purchase platinum jewelry in all regions of the world. JM also expects China to increase its inventories for the year. However, a continued increase in the price of the precious metal could cause more manufacturers and retailers to white gold and palladium.

Demand for palladium jewelry manufacturing jumped 54 percent to 1.43 million ounces in 1995, up from 930,000 ounces during the previous year. Chinese purchases of the metal jumped by 71 percent to 1.2 million ounces alone, driven by manufacturers increasing production to meet strong orders from wholesalers and retailers. The introduction and the rapid acceptance of Pd990 jewelry (99 percent palladium) has been included with retailers existing supplies of Pd950.

From 2003 to 2005, jewelry, as a percentage of total demand for palladium, grew from 3.5 percent to 20 percent, Zadoff said. Palladium also has a number of automotive and industrial uses.

B.J. Williams, JM’s marketing manager, jewelry North America, said that while orders from manufacturers are up, it is unknown if those numbers reflect consumer buying trends. Retail sales are up, but by less than 71 percent, he said.

The attractiveness of palladium in China is its lower cost, its purity (white gold contains 75 percent gold at the most), and it is considered a good investment since it doesn’t have the same market volatility as platinum. Palladium currently trades at about $400 an ounce as opposed to up to $1,300 an ounce for platinum. And white gold (palladium’s main competitor in China) contains about 75 percent gold as opposed to palladium, which has a purity of 95 to 99 percent.

“People are looking to substitute for platinum and palladium is just a more attractive alternative, and a more attractive alternative to white gold,” Williams said.

Platinum remains the metal of choice for the country’s wealthiest consumers in its largest cities while palladium offers an affordable entry point into the precious metal jewelry market for less affluent consumers in more rural areas of the country.

Outside of China, most of the demand for palladium in jewelry stems from its use in the production of platinum and white gold alloys. However, Williams said that has been interest in the production of Pd950 palladium jewelry in North America and a number of manufacturers began producing limited quantities of jewelry.

JM says that outlook for jewelry demand is unknown because of the investment of large inventories in 2005.

Demand and outlook
JM, in its report, said worldwide platinum demand rose 4.8 per cent to 6.70 million ounces last year while supply rose 2.2 per cent to 6.63 million ounces, leaving a deficit of 70,000 ounces, the seventh consecutive year of deficit. JM says the outlook for the precious metal in 2006 is positive based on strong demand for autocatalysts that will push purchases past the 4-million ounce mark.

Supplies of palladium dipped by 2.2 percent to 8.38 million ounces while demand rose 7.3 percent to a five year high of 7.04 million ounces. JM forecasts “mixed prospects” in demand for the remainder of 2006. Demand for its use in autocatalysts will continue to increase but uncertainty in the China’s jewelry sector may drag on total demand. In addition, if there is a major sell off in the market, prices could drop from highs of $400 to lows of $260.