Date published: 04/06/2012
Platinum & Palladium – both precious metals continue to disappoint relative to gold.
One of the intriguing aspects of the performance of gold over the past 12 months has been the corresponding underperformance of other precious metals like platinum and palladium. Investors who have sought to potentially diversify their gains from gold and silver have been instead spooked by the rather underwhelming performances of both platinum and palladium.
The clear disparity over the past 12 months between the price performance of gold (black line) and platinum (orange line) is evident in the chart below. Gold is up by around 10%, whilst platinum is down by almost 15%.
Figure 1 Gold Daily
Whilst platinum and palladium are classed as precious metals and have some investment and jewellery component to their consumption and usage, primarily they’re industrial metals. Their major specific use is in the motor vehicle industry to help maintain air quality, where they are used in catalytic converters in exhaust systems to convert emissions into less harmful substances.
Unfortunately, market fundamentals for platinum remain weak with the metal registering its seventh consecutive gross surplus during 2011 and likely to experience a similar outcome this year, according to Thomson Reuters GFMS. Palladium meanwhile remained in a gross deficit during 2011 and it’s likely to increase this year. In the ninth edition of its ‘Platinum & Palladium Survey’ launched in London and Johannesburg late this week, the consultancy forecast platinum would trade in the range of US$1,475/oz to US$1,775/oz over the remainder of 2012.
The rise in gold investment likely during the second half of 2012 could spill over into the platinum market, with prices likely to find solid support from production cost pressures in the South African mining industry. But the group has also flagged the ongoing Eurozone crisis as a “major” downside risk, given the concentration of platinum autocatalyst demand in Europe. GFMS estimated that platinum’s gross surplus eased by some 12% last year to 735,000 oz although this remained substantial by historical standards.
Figure 2 Palladium
“The fact that platinum prices remained elevated over much of last year, enabling a new all-time high in yearly average terms of US$1,722/oz, was testament to broadly favourable investor sentiment, evidenced by a 12% rise in world investment demand,” according to GFMS global head of metals analytics Philip Klapwijk.
The narrowing of the gross surplus in platinum was largely due to an almost 7% rise in fabrication demand to a three-year high, outweighing a near 5% rise in global platinum supply last year. The gains are apparently broadly based, led by a marked recovery in Chinese jewellery off-take, as prices declined sharply during the latter part of 2011.
Similarly, retail investment also recorded sizeable gains towards the end of the year, pushed by resurgent sales in Japan, as platinum traded cheaper than gold.
GFMS reported a 4% growth in platinum autocatalyst demand; however, this was restrained by the effects of continuing substitution (in favour of palladium), lacklustre vehicle production in Europe and the Fukushima earthquake in Japan last year. As a result, platinum autocatalyst demand remained considerably short of pre-recession levels.
Last year’s supply growth was driven by a recovery in Canadian mine production as Brazilian miner Vale’s operations returned to normal and mining ramped up at the Lac des Iles mine. Meanwhile, platinum supply from autocatalyst recycling grew by close to 9% last year, a performance that might have been stronger were it not for a fourth-quarter decline in the face of weaker platinum-group metals prices.
The survey also showed that jewellery scrap rose by 11%, owing to a rise in Japanese recycling that benefited from further development of the country’s collection infrastructure.
Figure 3 Palladium Global Holdings
As for palladium, GFMS revealed that during 2011 the metal’s gross deficit almost halved to 313,000 oz due largely to a relatively subdued 2% rise in global fabrication, which nonetheless reached an 11-year high. This featured a solid 5% lift for palladium autocatalyst demand (also an 11-year peak), driven by firmer demand in gasoline applications and substitution-related gains at the expense of platinum.
These gains were however partially offset by weaker off-take in most other areas of palladium fabrication demand, with the heaviest losses having emerged in jewellery, especially in China, which declined to an eight-year low. As a result, the relatively modest increase in global palladium fabrication was outstripped by a 5% rise in supply, which posted a new record high. In addition to a lift of more than 3% in mine production, this was a function of robust gains in autocatalyst recycling.
Palladium prices still posted a record high yearly average in 2011 of US$734/oz, despite a smaller gross deficit, substantial liquidations from exchange traded fund holdings and a reduction in investors’ long-term positions on futures markets. “This followed a dramatic rise in prices during late 2010 and early 2011. And even though last year saw palladium prices fall by 20% on an intra-year basis, the decline was limited to the last four months, and driven very much by profit taking,” Klapwijk commented.
He added that palladium prices were also likely to benefit from the favourable investor climate towards precious metals, while the downside might be limited as palladium’s demand base in autocatalysts was less exposed to Europe and was more broadly based geographically. Overall, palladium is forecast to trade in a range of US$575/oz to US$775/oz through to the end of this year.
Figure 4 Gold / Platinum price ratio
The chart above highlights the discrepancy in gold and platinum prices, largely explained by the fact that gold is essentially an investment metal and a store of value in times of crisis, whilst platinum is essentially an industrial metal. In the near-term and given ongoing financial market uncertainty, it’s unlikely in my view that we’ll see platinum outperforming gold; hence we won’t be swapping our gold exposures for platinum.
For more information, or to discuss your specific situation, please contact me directly.
Founding Director & Senior Resource Analyst
MineLife Pty Ltd
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