Johnson Matthey said in its latest PGM market report the platinum deficit of 127,000 ounces was forecast after a record surplus of 375,000oz in 2018, which had grown from a surplus of 44,000oz on 2017.

"A surge in investment buying and higher automotive consumption will underpin a 9% gain in gross platinum demand in 2019, offsetting weakness in the Chinese platinum jewellery market, where platinum faces increased competition from karat gold jewellery," the consultancy said.

The World Platinum Investment Council (WPIC) also saw higher investment demand for platinum boosting total demand by 8% year-on-year to 8 million ounces in 2019, according to its Platinum Quarterly report, saying this would more than offset softer demand in the automotive and jewellery segments.

However, the WPIC was of the view that, although this would cause the market's surplus to narrow to 375,000oz from the previously forecast surplus of 680,000oz, and down 44% from 2018, it would not yet go into deficit.

Johnson Matthey estimated investment demand for the year at 858,000oz, much higher than last year's 67,000oz when there was significant ETF liquidation in Europe and South Africa.

Principal analyst Alison Cowley, who wrote the report, said between mid-2018 and early-2019, the platinum price was close to 10-year lows, while palladium set a series of all-time records.

"Some investors now think that platinum is under-priced, given the improving outlook for automotive demand and uncertainties over supply.

"This led to a dramatic turnaround in sentiment during the first quarter of 2019, when investors bought nearly 700,000oz of platinum ETFs. This seems to be net new investment, rather than investors switching out of palladium into platinum," she said.

Johnson Matthey forecast automotive demand for platinum in 2019 to climb 3% year-on-year to 3.1Moz, due to use of platinum catalysts on trucks.

The increased demand from heavy-duty vehicles was particularly likely in China, with strict China 6 emissions legislation due to be implemented in some provinces and cities starting in July.

"The new regulations will apply nationwide from July 2020, while India will also introduce strict emissions regulations for trucks next year," Johnson Matthey said.

Meanwhile, jewellery and industrial demand were both forecast to fall year-on-year, by 2% and 6%, respectively, to 2.2Moz and 2.3Moz.

Another factor likely to contribute to deficit is processing backlogs in the South African platinum industry.

Supplies from the country have been flat for several years, but Johnson Matthey said they could rise by 2% in 2019 to 4.6Moz if the backlogs were cleared, although there was still downside risk from potential electricity shortages and strikes.

Total global platinum supply is expected to edge up 1% this year to 6.2Moz, not enough to offset the 9% higher gross demand expected at 8.5Moz.

The consultancy expects recycling in 2019 to climb 5% to 2.2Moz, but it said auto recycling processing capacity constraints could check growth.

The WPIC was more optimistic about supply, forecasting it to rise 4% this year to 8.4Moz, including recycling, however, it said potential power disruptions and industrial action were risks to South African mining supply.

Palladium deficit to widen

Johnson Matthey predicted the palladium market's deficit would continue to widen, primary and secondary supplies unable to keep pace with the growth in automotive demand.

The 2019 deficit is forecast at 809,000oz, up from a deficit 121,000oz last year, but not quite reaching the 875,000oz deficit in 2017.

The consultancy said palladium ETF selling had helped balance the market in 2018, but remaining holdings were no longer sufficient to bridge the gap between supply and demand.

The palladium price hit a record $1,600 per ounce in March due to persistent market deficits, but despite the high prices ETF selling dried up in the March quarter.

Investment selling was expected to amount to 310,000oz, compared with 574,000oz last year

However, Johnson Matthey market research director Rupen Raithatha said there was still some potential for profit-taking this year.

Overall palladium demand was forecast to rise 9% to 11.15Moz, due to an equal rise in autocatalyst demand to 9.5Moz.

The consultancy said the main driver was the China 6 emissions legislation, which would result in a step change in palladium loadings on Chinese cars.

The report also looked at the Euro 6d legislation, which is spurring additional palladium use in European gasoline cars.

Johnson Matthey principal automotive analyst Margery Ryan said the Euro 6d legislation was having a significant impact on the palladium market.

"Vehicles are being tested under a wider range of driving conditions, making emissions control more challenging. Exhaust aftertreatment systems are becoming more complex and automakers are adding more palladium to meet the new requirements," she said.

Palladium jewellery demand was expected to be stable at 156,000oz, while industrial demand was set to fall 5.5% to 1.8Moz.

Johnson Matthey forecast palladium supply to remain flat at 7Moz, with supply from South Africa due to rise 8% to 2.7Moz, offsetting a 6% drop in Russian supplies to 2.8Moz.

"Production at Norilsk Nickel will continue to benefit from the processing of palladium-rich surface materials, but shipments are forecast to be lower than in 2018, when substantial stock sales occurred. Secondary supplies are forecast to increase again, but the rate of growth should moderate following two years of very rapid gains," it said.

Total recycling for the year is estimated at 3.3Moz, up from 3.1Moz last year, mainly due to higher auto scrap volumes.

It also looked at other PGM products, with rhodium, ruthenium and iridium all forecast to remain in surplus in 2019.