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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

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

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

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�10

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.

Alchemist 58 DRAFT:Alchemist34 09/04/2010 17:03 Page 10

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