Secretive Swiss vaults may hold missing link in platinum price equation

By Silvia Antonioli and Clara Denina

LONDON (Reuters) – Underground vaults next to a Swiss farming village may reveal one reason for the platinum market's indifference to its biggest ever supply shock.

Most analysts and market players expected steep price increases for the precious metal as a record five month mining strike in South Africa, which ended on Tuesday, wiped out some 40 percent of global supply.

Yet values have been stuck in a $140 an ounce range gaining just five percent so far this year.

Estimates of total platinum stock value vary by billions of dollars, mainly because of uncertainty over how much metal is stored in off-shore vaults.

The Zurich Freilager, or freezone, has been used since the 1920s to store valuables, but very little is known about what goes in and out of the industrial park, advertised by precious metals brokers for the high level of privacy it offers.

Its vaults alone could hold around 20 percent of the total stocks of platinum in London and Zurich, the world's two main two storage centres for the metal, market players said.

"Miners, refiners, investors, trade houses: they all hold stocks there," a German trader close to the car industry said.

He and other sources in the industry, the main consumer of the metal for catalytic converters, said this was a major reason prices did not shoot up with the strike.

"Every company knows how much it has but not how much the others have. But users know that there is metal there and therefore there was no panic buying," the trader said.

Storing metal in bonded warehouses is routine practice among purveyors of commodities and the companies involved have not come under the kind of international pressure for more disclosure felt by Switzerland's famously secretive banks.

The Swiss Federal Department of Finance (FDF), however, voiced concern over the Freilager system in a consultation paper in 2012 that is expected to lead to some reforms by the end of this year. Among issues it raised was the ease with which the stored goods can be sold in the vaults without tax consequences.

In April, the Swiss Federal Audit Office noted the warehouses' role in easing trade but asked the government to present a more comprehensive plan for them by the end of 2015 "that takes the economic and political stakes into account".

Its report noted issues such as "errors relating to the customs tariff, declaration of origin when declaring goods; inventory irregularities; a lack of traceability of the merchandise; and flaws in stock accounting".

The Swiss Union of Freeports which represents the industry was not immediately available to comment.

PRIVACY

Freilager's tax-exempt status means any platinum stored there does not appear in official import/export data and few people get to see it, let alone assess how much is there.

Mark O'Byrne, director of precious metals brokerage Goldcore, visited an underground vault there in 2008 and saw 1kg and 6kg bars or platinum. But it was not stored by itself. "There were a large number of pallets on which were piled an array of gold, silver, platinum and palladium bars," he said.

While small holders might share a vault with others, medium-large companies would normally have their own.

Zurcher Freilager AG, the company named after the free zone area in which it lets space for storage, said that what companies store in rented premises was "beyond our knowledge".

It declined Reuters access to their facilities.

"We don't … give information about clients' business and the facilities of our company," chief financial officer Frank Smits said in an email. Logistics firm Via Mat International, one of the main companies that brokers say rents space from Zurcher Freilager AG to store customers' metal, said it operates vaults in bonded warehouses in the greater Zurich area but declined to give further information, citing security and confidentiality.

Zurich has traditionally been the hub of platinum storage and distribution by traders, bankers and producers, although Singapore, Hong Kong and London have tax free storage areas too.

INCREASED STORAGE

Swissmetal Inc. (SMI) stores over 400 tonnes of precious and rare strategic metals in Zurich Freilager, with a partner, but said it could not disclose how much of it was platinum.

"Over the past few years, the amount of metal stored in the Zurich free zone has increased a lot," said General Manager Knut Anderson, who last visited the Freilager vaults five months ago. "Demand for storage space (there) now outstrips supply."

Market players in all commodities seek to keep their holdings under wraps, but most do not have the option, for largely logistical reasons.

Large amounts of copper for example are stored in bonded warehouses in China but flows have been tracked since the warehouses started to be used, in the 2000s.

Bonded stocks estimates for copper are available and vary by only about 10-20 percent unlike those for platinum, which has been stored in vaults for almost a hundred years.

"Copper warehouses are still generally accessible. You can go and take a look or probably you know somebody who has taken a look," Macquarie head of metals research Colin Hamilton said.

"But platinum has been there for years and the metal is stored in a vault so unless you have access to that vault, which would be limited to very few people, then no one is going to know."

Given the lack of visibility, most platinum analysts ignore off-shore stock movements when estimating global inventories, generally including import data, stocks backing platinum futures contracts and exchange-traded fund (ETF) holdings.

The resulting estimates range from 4 million to 20 million ounces, worth anything between $5.8 billion and $29 billion.