)˛ˆ !$#ˇ$# *!!˚$# ’ ˆ) (($˘˚ )˚$# )52 ˘56;2@2 %9.a6;b ... · prices: the falling...

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THE LONDON BULLION MARKET ASSOCIATION page 8 The Chinese Platinum Jewellery Market By David Jollie, Publications Manager, Johnson Matthey ALCHEMIST ISSUE FIFTY EIGHT Annual demand for platinum from the Chinese jewellery sector has increased by more than ten- fold in the two decades from 1990 to 2009 as this market has developed. Despite this relative maturity, last year saw record demand of 1.75 million ounces of metal (net of recycling) (ref 1), – more than double the figure for the previous year. In part, this exceptional performance was due to the fall in the platinum price during the second half of 2008, but the market dynamics that led to this outcome were rather more complex than this simple statement might suggest. A short guide to jewellery demand Net demand for platinum in the jewellery industry can be thought of as composed of three separate components: on the positive side, there are manufacturing volumes for jewellery and any increases in stocks of unprocessed or semi-processed metal anywhere within the jewellery industry. Together, these equate to gross jewellery demand for platinum. On the negative side, of the equation is the return of metal from unsold retail stocks or from previously owned jewellery. The picture is complicated by the possibility of imports and exports (although these are relatively insignificant in comparison to domestic Chinese production for domestic sale) and by the recycling of metal within a jewellery manufacturer (accounted for by treating a manufacturer as a so-called black box and measuring only metal entering and leaving that ‘box’ as affecting demand). In order to understand the trends in net demand in the jewellery market, therefore, it is ‘only’necessary to understand any and all factors that can affect manufacturing demand, anything that can alter sentiment and behaviour in terms of metal stocking or destocking within the jewellery industry, and the driving forces behind recycling within the Chinese market. Manufacturing volumes Changes in manufacturing volumes can be viewed from three different perspectives: consumer pull, manufacturer push and supply chain issues, all of which have a bearing on metal demand. Consumer pull Consumer pull is the most important of these three factors in a normal year. A simplistic view of this market based on this perspective would suggest that a low platinum metal price directly generates additional demand by improving the affordability of platinum jewellery. Although there is some truth in this model, unfortunately, such conventional wisdom appears to have only a limited relevance in this case. Plain platinum jewellery (ie without any precious or semi- precious stones) is typically priced in ChineseYuan per gram across most of China, and keen competition between retailers often means that a de facto retail price exists in an individual city. While this does respond to movements in the international price of platinum, it can show a considerable time-lag. Many retailers were slow to reduce prices in the early part of 2009 as they averaged down metal prices on existing stock. Thus, although the metal price had fallen, consumer prices were relatively slow to follow. In some cities, retail prices were therefore still falling even as the platinum price rose in the second half of 2009. Thus the ‘Economics 101’ argument mentioned above does have some validity when looking at retail prices rather than metal prices: the falling retail price certainly allowed platinum jewellery to compete more effectively against other products that could capture a share of the consumer’s disposable income, boosting demand. More importantly, though, the retail price of gold moves in very close correlation to the international price of that metal. The gap between the retail prices of these two metals (platinum and gold) therefore narrowed significantly in many cities in China throughout the year. Although gold has a strong emotional and historical connection for many Chinese people, it is sometimes considered more old-fashioned (something that is particularly true for 24 carat yellow gold). Qualitative research by Platinum Guild International (PGI) suggests that platinum has a cachet and an appeal to younger consumers and can be an aspirational purchase. Thus, although the gold market remains much larger Global demand for jewellery fell from 2005 to 2008 under pressure from rising metal prices. However, 2009 showed a remarkable resurgence in net demand in China and Japan.

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Page 1: )˛ˆ !$#ˇ$# *!!˚$# ’ ˆ) (($˘˚ )˚$# )52 ˘56;2@2 %9.A6;B ... · prices: the falling ,!.˛%’ price certainly allowed platinum jewellery to compete more effectively against

T H E L O N D O N B U L L I O N M A R K E T A S S O C I A T I O N

page�8

The Chinese Platinum Jewellery

MarketBy�David�Jollie,�Publications�Manager,�Johnson�Matthey

A L C H E M I S T I S S U E F I F T Y E I G H T

Annual demand for platinum

from the Chinese jewellery sector

has increased by more than ten-

fold in the two decades from 1990

to 2009 as this market has

developed. Despite this relative

maturity, last year saw record

demand of 1.75 million ounces

of metal (net of recycling) (ref 1),

– more than double the figure

for the previous year.

In part, this exceptional

performance was due to the fall

in the platinum price during

the second half of 2008, but the

market dynamics that led to this

outcome were rather more complex

than this simple statement might

suggest.

A short guide to jewellery demand

Net�demand�for�platinum�in�the�jewelleryindustry�can�be�thought�of�as�composedof�three�separate�components:�on�thepositive�side,�there�are�manufacturing�volumesfor�jewellery�and�any�increases�in�stocksof�unprocessed�or�semi-processed�metalanywhere�within�the�jewellery�industry.Together,�these�equate�to�gross�jewellerydemand�for�platinum.��On�the�negative�side,of�the�equation�is�the�return�of�metal�fromunsold�retail�stocks�or�from�previously�owned

jewellery.��The�picture�is�complicated�by�thepossibility�of�imports�and�exports�(althoughthese�are�relatively�insignificant�in�comparisonto�domestic�Chinese�production�for�domesticsale)�and�by�the�recycling�of�metal�within�ajewellery�manufacturer�(accounted�for�bytreating�a�manufacturer�as�a�so-called�blackbox�and�measuring�only�metal�entering�andleaving��that�‘box’�as�affecting�demand).

In�order�to�understand�the�trends�in�netdemand�in�the�jewellery�market,�therefore,��itis�‘only’necessary�to�understand�any�and�allfactors�that�can�affect�manufacturing�demand,anything�that�can�alter�sentiment�andbehaviour�in�terms�of�metal�stocking��ordestocking�within�the�jewellery�industry,�andthe�driving�forces�behind�recycling�within�theChinese�market.

Manufacturing volumes

Changes�in�manufacturing�volumes�can�beviewed�from�three�different�perspectives:consumer�pull,�manufacturer�push�and�supplychain�issues,�all�of�which�have�a�bearing�onmetal�demand.

Consumer pull

Consumer�pull�is�the�most�important�of�thesethree�factors�in�a�normal�year.��A�simplisticview�of�this�market�based�on�this�perspectivewould�suggest�that�a�low�platinum�metal�pricedirectly�generates�additional�demand�byimproving�the�affordability�of����platinumjewellery.��

Although�thereis�some�truth�in�thismodel,�unfortunately,such�conventionalwisdom�appears�to�haveonly�a�limited�relevancein�this�case.

Plain�platinumjewellery�(ie�withoutany�precious�or�semi-precious�stones)is�typically�priced�inChinese�Yuan�per�gramacross�most�of�China,and�keen�competitionbetween�retailers�oftenmeans�that�a�de�facto�retail

price�exists�in�an�individual�city.��While�thisdoes�respond�to�movements�in�theinternational�price�of�platinum,�it�can�showa�considerable�time-lag.��Many�retailers�wereslow�to�reduce�prices�in�the�early�part�of�2009as�they�averaged�down�metal�prices�on�existingstock.��Thus,�although�the�metal�price�hadfallen,�consumer�prices�were�relatively�slowto�follow.��In�some�cities,�retail�prices�weretherefore�still�falling�even�as�the�platinumprice�rose�in�the�second�half�of�2009.Thus�the�‘Economics�101’�argumentmentioned�above�does�have�some�validitywhen�looking�at�retail�prices�rather�than�metalprices:�the�falling�retail price�certainly�allowedplatinum�jewellery�to�compete�moreeffectively�against�other�products�that�couldcapture�a�share�of�the�consumer’s�disposableincome,�boosting�demand.More�importantly,�though,�the�retail�price�ofgold�moves�in�very�close�correlation�to�theinternational�price�of�that�metal.��The�gapbetween�the�retail�prices�of�these�two�metals(platinum�and�gold)�therefore�narrowedsignificantly�in�many�cities�in�Chinathroughout�the�year.��Although�gold�hasa�strong�emotional�and�historical�connectionfor�many�Chinese�people,�it�is�sometimesconsidered�more�old-fashioned�(somethingthat�is�particularly�true�for�24�carat�yellowgold).��Qualitative�research�by�Platinum�GuildInternational�(PGI)�suggests�that�platinum�hasa�cachet�and�an�appeal�to�younger�consumersand�can�be�an�aspirational�purchase.��Thus,although�the�gold�market�remains�much�larger

Global demand for jewellery fell from 2005 to 2008 under pressure from rising

metal prices. However, 2009 showed a remarkable resurgence in net demand

in China and Japan.

Alchemist 58 DRAFT:Alchemist34 09/04/2010 17:03 Page 8

Page 2: )˛ˆ !$#ˇ$# *!!˚$# ’ ˆ) (($˘˚ )˚$# )52 ˘56;2@2 %9.A6;B ... · prices: the falling ,!.˛%’ price certainly allowed platinum jewellery to compete more effectively against

A L C H E M I S T I S S U E F I F T Y E I G H T

page�9

than�the�platinum�jewellery�market�in�China,consumer�demand�for�the�white�metalbenefited�from�this�narrow�price�differential,with�platinum�becoming�relatively�moreattractive�to�some�consumers�as�the�prices�ofthese�two�metals�approached�one�another.One�clear�example�could�be�found�byexamining�the�metal�of�choice�for�gem-set(diamond-containing)�jewellery.��Visits�to�anumber�of�Chinese�cities�in�early�2008revealed�that�white�gold�alloys�were�gaining�anincreasing�share�of�the�space�available�in�shopcounter�displays�in�order�to�maintain�theaffordability�of�these�gem-set�products�as�theplatinum�price�rose.��However,�the�fall�in�theprices�of�platinum�and�of�diamonds�later�in�theyear�improved�consumer�affordability,ensuring�that�retailers�had�returned�toplatinum�as�the�metal�of�choice���by�early�2009–�both�in�response�to�latent�consumer�interestand�in�order�to�maintain�profit�margins�at�theretailer.��However,����there�were�other�factorsdriving�the�Chinese�consumer’s�behaviour.The�buoyancy�of�the�Chinese�domesticeconomy�during�2009�maintained�disposableincomes�at�high�levels������in�most�cities.��Theready�flow�of�credit�to�commercialorganisations�has�been�an�endless�source�ofinterest�to�Western�commentators,�but�otherfactors�seem�to�have�been�more�important�infuelling�this�spending�spree�on�platinum.��Thestrong�performance�of�the�Shanghai�Stock

Exchange�may�havereinforced�the�feel-goodfactor�amongst�much�ofthe�populace,�encouragingspending�on�non-essentialitems.����What�feels�like�anascent�housing�pricebubble�in�cities�such�asShanghai�also�seems�tohave�boosted�people’sperception�of�their�ownpersonal�wealth�andthereby�contributedadditional�consumerdemand�for�platinumjewellery�amongst�othergoods.

Moresurprisingly,�the�risingplatinum�price�itself�wasarguably�beneficial�indriving�sales.��All�preciousmetal�jewellery�sold�inChina�brings�with�it�adegree�of�status�and��alsoacts�as�a�‘store�-of�-value’.The�steady�increase�in�theunderlying�metal�priceduring�2009�was�noticedby�some�consumersdespite�the�more�lethargicmovements�in�the�retailprice�and�doubtless

contributed�a�degree�of�additional�consumerdemand.��As�a�side�note,�in�the�longer�term,it�will�be�interesting�to�see�whether�theprecipitous�fall�in�the�platinum�price�of�late2008�has�any�effect�on�the�perception�ofplatinum�as�a�“store-of-value”,�but�this�seemsnot�to�have�been�a�dominant�factor�during2009.����������������������������������������������������

Finally,�calendar�effects�should�not�beignored.��While�it�is�not�trivial�to�attempt�toexplain�the�impact�of�the�Chinese�calendar�onthe�number�of�weddings�held�in�a�year�in�ashort�article,�the�huge�number�of�weddingstaking�place�on�9�September�2009�(ref�2,�3)does�indicate�its�relevance.��Added�to�this,�the60th�anniversary�of�the�founding�of�thePeople’s�Republic�of�China�and�the�fact�thatValentine’s�Day�fell�on�a�Saturday�also�bothappear�to�have�boosted�sales�of�platinum�andof�other�precious�metal�jewellery.��All�of�thisextra�consumer�demand�drove�greatlyincreased�volumes�at�the�manufacturing�level.

Manufacturing volumes: manufacturer

push and supply chain issues

Several�years�of�rising�metal�prices�had�drivena�slow�reduction�in�stocks�of�finished�jewelleryat�the�retail�and�wholesale�level,�and�late�2008and�early�2009�provided�a�good�opportunityto�rebuild�these�to�previous�levels.��Withconsumer�interest�high,�retailers�went�further

and�actually�expanded�their�stock�levels,confident�that�they�could�still�turn�themover�on�an�acceptable�timescale.��With�salesstrong�and�the�economy�growing,�independentjewellers�built�new�stores�in�cities�wherethey�already�operated�and�also�expanded�intosmaller,�less�wealthy�locations�too,�generatingmore�sales�and�taking�more�stock�in�theprocess.

In�department�stores,�where�muchChinese�jewellery�is�sold�to�consumers,the�store�charges�a�percentage�of�turnoveras�commission�from�the�individual�concession-holders.��A�high�gold�price�and�good�levelsof�sales�of�most�jewellery�encouraged�theselarger�stores�to�devote�more�floor�space�tojewellery�too.��It�is�questionable�how�mucheffect�this�action�had�on�sales�of�platinum,but�it�did�contribute�to�the�increased�levelsof�stock�being�held�throughout�the�industry.

High�consumer�demand�also�provedbeneficial�at�the�manufacturer�level.��After�therelatively�weak�first�three�quarters�of�2008,the�rapid�onrush�of�new�demand�fromretailers�drove�increased�levels�of�staffingand�higher�throughput.��Many�manufacturersbecame�constrained�by�capacity,�ie�they�couldhave�sold�more�jewellery�than�they�were�ableto�produce.��With�manufacturers’�profitmargins�typically�related�to�the�number�ofgrams�that�a�piece�weighs,�manufacturing�ofplatinum�jewellery�became�yet�more�attractivethan�manufacturing�gold�or�palladiumjewellery�(due�to�the�higher�density�ofplatinum�compared�to�these�other�two�metals,a�greater�weight�of�jewellery�can�be�producedin�platinum�than�in�gold�or�palladium�by�thesame�number�of�employees,�leading�to�higherprofitability),�adding�a�final�touch�of�strengthto�manufacturing�demand�for�platinum,perhaps�at�the�expense�of�gold�and�palladium.

Changes in stock levels

Having�noted�that�changes�in�the�weightof�finished�pieces�at�wholesalers�and�retailersthroughout�China�are�already�accounted�forin�manufacturing�demand,�the�questionremains�as�to�what�factors�can�impact�uponother�stock�levels.

Just�as�at�the�retail�level,�manufacturersresponded�to�several�years�of�rising�platinumprices�by�minimising�the�amount�of�metal�theyowned�in�raw�or�finished�form�or�as�metal�inprocess�in�their�factories.��By�the�time�metalprices�reached�their�peak�in�mid-2008,�thesestocks�had�probably�come�close�to�a�practicalminimum�level�and,�as�the�price�fell,manufacturers�bought�heavily�to�rebuild�stocklevels,�adding�several�hundred�thousandounces�to�platinum�demand�in�the�finalquarter�of�that�year�and�the�first�half�of�2009.

It�might�be�thought�that�the�picture�sincethat�date�has�changed�to�one�of�destockingas�manufacturers�battled�to�keep�stock�levels

Platinum jewellery can return back into the manufacturing chain when part

exchanged for new jewellery or when sold back in booths such as this.

Alchemist 58 DRAFT:Alchemist34 09/04/2010 17:03 Page 9

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T H E L O N D O N B U L L I O N M A R K E T A S S O C I A T I O N

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A L C H E M I S T I S S U E F I F T Y E I G H T

steady�in�local�currency�terms�against�the�tideof�a�rising�price.��There�is�indeed�someevidence�that�this�is�the�case�at�a�fewmanufacturers,�but�it�seems�likely�thatit�was�outweighed�overall�by�the�relativelycommon�Chinese�response�of�buying�into(or�gambling�on)�a�rising�price�as�noted�ina�recent�article�in�this�journal�(ref�4).��

Unsurprisingly,�the�improved�profitabilityof�the�jewellery�manufacturers�mentionedabove�also�led�to�new�companies�entering�thisspace,�adding�to�inventory�late�in�the�year.Some�of�the�larger�retailers�and�wholesalersalso�built�stocks�of�raw�metal�both�at�lowprices�and�as�the�price�rose,�in�effect�hedgingtheir�later�metal�requirements.

Recycling

According�to�Johnson�Matthey’s�figures(ref�1),�the�amount�of�metal�recycled�fromold�jewellery�stock�and�from�second-handjewellery�climbed�from�210,000�oz�in�2008to�300,000�oz�in�2009.��Within�this�number,it�is�likely�that�the�amount�of�metal�returnedby�retailers�for�remanufacturing�actuallydecreased.��This�recycling�stream�is�typicallycomposed�of�rings�and�other�jewellery�that�hasremained�unsold�due�to�unattractive�design,low�manufacturing�quality�or�simplyremaining�in�a�showcase�long�enough�to�moveout�of�fashion.��A�number�of�personal�visitsto�the�Chinese�market�suggest�that�both�designand�quality�have�improved�during�recentyears,�leading�to�lower�recycling�requirementsfrom�retailers.��However,�more�importantly,with�retail�sales�having�been�particularlystrong�during�2009�compared�to�2008,�lessstock�would�have�remained�unsold�for�longenough�to�date�the�design.��With�manyretailers�looking�to�increase�their�total�stocklevels,�it�may�also�have�been�less�important�toretailers�to�rationalise�existing�stock:�theirefforts�would�have�rather�been�spent�on

replacing�pieces�thathad�been�sold.Looking�at���therecycling�of�second-hand�jewellery,�thereare�two�routes�for�themetal�to�return.��Many,if�not�most,�retailerswill�provide�creditagainst�platinum�pieceshanded�in�as�partexchange�for�newjewellery.��The�metalthus�returned�–�oftenfrom�broken�pieces�orfrom�old-fashioneddesigns�–�will�usuallyfind�its�way�back�intothe�jewellerymanufacturing�chain�atsome�point.��Hard�data

is�difficult�to�find�on�how�much�metal�mightbe�returned�through�this�route,�but�anecdotalevidence�suggests�that�a�rough�estimate�of10%�of�the�weight�of�metal�sold�in�the�formof�new�jewellery�could�be�returned�in�partexchange.��The�substantial�uplift�in�retailpurchasing�of�2009�should�therefore�havelifted�the�amount�of�metal�recycled�in�thisway.

The�final�route�for�metal�to�return�to�themanufacturer�is�through�kiosks�purchasing�oldjewellery.��As�metal�prices�have�increased�overrecent�years,�these�have�become�more�widelyseen�–�just�as�in�Japan�–�and�provide�a�route�tosell�old�or�broken�jewellery�for�cash�ratherthan�in�part�exchange.��Volumes�of�metalreturning�to�manufacturers�through�this�routepeaked�in�the�first�half�of�2008�but�declinedrapidly�as�the�price�fell.��They�have�sincerecovered�steadily�as�the�internationalplatinum�price�has�risen,�improving�theeconomics�of�this�business�and�providingan�improved�return�to�the�consumer�sellingan�old�ring.

2010: another auspicious year for

platinum jewellery demand in China?

Although�the�outlook�for�underlying�platinumdemand�from�the�Chinese�jewellery�sectorremains�positive,�it�would�be�greedy�to�expectanother�year�showing�such�extraordinarygrowth.��The�factors�leading�to�the�widespreadstock-building�seen�in�2009�(and�late�2008)appear�unlikely�to�be�repeated,�leading�toa�closer�correlation�between�gross�demandand�consumer�purchasing.��At�the�time�ofwriting�(early�February�2010),�the�rawplatinum�price�is�at�a�substantially�higher�levelthan�for�most�of�2009�and�purchasing�by�theChinese�jewellery�industry�appears�to�haveslowed�somewhat�as�a�result,�albeit�withsubstantial�purchasing�occurring�wheneverthe�price�has�fallen.��However,�the�more

important�issue�this�year�is�likely�to�be�theattitude�of�the�consumer.��With�the�ChineseNew�Year�and�Valentine’s�Day�occurring�onthe�same�date�this�year,�sales�at�this�timewill�be�important�in�demonstrating�whetherunderlying�consumer�demand�can�growfurther�from�last�year’s�levels�in�the�short

term.n

References

1 David Jollie, Platinum 2009 Interim Review, Johnson

Matthey, November 2009

2 Philip Klapwijk, “Will China Overtake India to

Become the World’s Largest Manufacturer of Gold?”,

The Alchemist, LBMA, January 2009

3 Luo Hualin, “Rush to Register Marriages on Lucky

‘Triple Nine Day’, Women of China,

http://www.womenofchina.cn/Issues/Marriage_Famil

y/212512.jsp

4 “China rush on ‘lucky’ wedding day”, BBC,

http://news.bbc.co.uk/1/hi/8245765.stmi

David Jollie isPublications Managerat Johnson Matthey’sPrecious MetalsMarketing business,based in Royston inthe UK. In this role,he has beenresponsible for writing

and producing Johnson Matthey’s twice-yearly review of the platinum group metalsmarkets since 2006.

David has worked at Johnson Mattheysince 1997 in a range of positions.His first role was in developing emissioncontrol catalysts for both the light andheavy-duty diesel vehicle markets. Sincethat date, he has focused on market analysisand market development primarily on thedemand side of the platinum group metals.

David has a degree in chemistry from theUniversity of Oxford and a doctorate ininorganic chemistry from the University ofNottingham.

Purchasing of platinum on the Shanghai Gold Exchange -- where much of the metal

used in the Chinese jewellery industry is sourced -- increased in the second half of

2008 and remained strong throughout 2009 in response to lower metal prices.

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