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TRANSCRIPT
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.
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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.
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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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