We believe a key risk to demand is a significant decline in Chinese purchases, specifically in platinum where we estimate that 2009 is likely to be a record year, with 1700,000 ounces destined for the Chinese jewellery industry. We estimate total Chinese demand at 2.06m ounces in 2009, with imports at 1.64m ounces according to customs statistics, implying consumption out of existing stocks. While we do expect the level of jewellery demand to fall in 2010 (by c.10% to 1.53m ounces), we expect industrial demand to make up the difference with net Chinese demand increasing to 2.1m ounces. Initial import data points to a strong year. In platinum, net imports for the first two months of the year are 2.26m ounces on an annualised basis. In palladium the first two months have been strong with imports up 244% y-o-y to 900,000 ounces on an annualised basis. Measures such as reserve rate requirements and interest rate hikes may well curb some of the more speculative end of the Chinese buying, but a moderately appreciating Renminbi should offset this to a certain extent.

The trading activity in platinum on the Shanghai Gold exchange also gives us some insight into Chinese buying patterns. Activity over the past 12 months has been significant, with the average five day moving average daily traded volume at 231kg vs the average of 160kg since records began. The highest five-day moving average daily volume was recorded in the middle of January at 592kg, in the run-up to the Chinese New Year. We note that volumes have been more muted post the Chinese New year at c.145kg/day. Our main observation is that Chinese activity pricks up during price dips, which is supportive for the platinum market in our view.

The auto sector has had a strong start to the year - some risks still remain as "incentive schemes" unwind Sales, registration and production data coming out of the auto-sector has been strong since the start of the year, with the sponge/metals discount stable at US$1/ounce. (PGM in the sponge form is used in autocats, while ingots or bars are used in investments or jewellery. The metal form requires further processing and should command a premium - hence a small premium is an indicator of strong auto or industrial demand). We do recognise, however, that comparisons between 1Q10 vs 1Q09 are skewed due to the low base in 2009. A key risk to our bullish PGM view remains significantly declining sales in 2H in the US and Europe, which in turn has a knock-on effect on production levels. We highlight the key headlines over the past quarter: from the auto sector in the table below:

Eoin Treacy's view Platinum was hit particularly hard during the fallout from the credit crisis, falling to parity against gold for the first time since 1996. However, since late 2008, it has resumed its leadership role, advancing consistently in absolute terms and when compared to gold. The main consistency characteristic has been the unbroken progression of higher reactions which would need to be taken out in order to question medium-term upside potential. Prices are currently pressuring the January high near $1654 and a downward dynamic would be required to check momentum beyond a brief pause.

Relative to gold, palladium fell even more than platinum but has subsequently rebounded faster and is trending somewhat more consistently. While it accelerated somewhat to the January high and pulled back rather sharply, it found support in the region of the upper side of the previous range and quickly rallied back to retest the high. It has been consolidating above $450 for most of March and a sustained move below that level would be required to question scope for a successful upward break.

Silver's performance has also been impressive although considerably less consistent than either platinum or palladium. It has sustained a progression of major reaction lows since October 2008 and these would need to be taken out to question potential for further upside. Silver recently found support in the region of $16.50 and is currently testing the upper side of the short-term range. A downward dynamic would be required to question scope for further upside.

Copper broke upwards to new recovery highs yesterday and sustained the gain today; holding above $3.50 for the first time since August 2008. A downward dynamic would be required to check momentum beyond a brief pause.

Given the commonality across precious and major industrial metals, the likelihood that gold will also push back up to retest and surmount its December highs remains favourable.