New interest in platinum and palladium

Confirmation of the increased interest in platinum and palladium has arrived in the form of the first annual survey by Gold Fields Mineral Services (GFMS), previously known for its work in gold and silver. This follows the entrance of fellow-consultant firm Virtual Metals to the field last year.

The new research attention not only reflects the wider interest in these markets but also concerns that the industry is over-dependent on market data provided from a “market participant” — namely precious metals refiner Johnson Matthey.

Overall, the GFMS data were uncontroversial, particularly as they took into account only the market supply-and-demand figures for the past five years, and the researchers refused to be drawn into a price forecast or even a market balance for 2004.

Generally the GFMS figures were similar to those of Johnson Matthey except that GFMS courageously excludes movements of inventory from the demand and supply sections and groups them together separately. In its conclusion, GFMS has a preference for palladium over platinum, though its support for this view is less than emphatic. For our part, we still have great reservations for the arguments given by GFMS for this bias.

GFMS agrees that platinum’s market fundamentals remain strong, though it cautions that “prices may have the scope to ease slightly.” The key to this view is demand. GFMS does not expect “sustained strong demand growth [for] platinum within the auto sector,” and there are several reasons for this: little scope for increased diesel penetration in Europe or elsewhere, reduced loadings, and increased flexibility to substitute from platinum to palladium (even in diesel technology). Our view is that although efforts are being undertaken toward substitution, significant impact market is unlikely until next year. GFMS also believes palladium will negatively affect platinum demand via palladium jewelry and white gold. Again, though we concede there is some truth in this, we are wary that a slowdown in Chinese platinum demand (as for the rest of the metals) has been overdone by the market and that significant re-stocking of inventory could occur in China, which recently returned from holiday.

For palladium, GFMS believes “a rise in price should . . . help erode the premium [from platinum].” The core reason for the GFMS’s optimism toward palladium is what is expected to be a continued recovery in demand — largely as a result of substitution from platinum but also from other industrial uses (electronics in particular). We are skeptical that these improvements will be market-significant until mid-2005. However, GFMS also believes supply growth will be more modest than current market expectations, with modest indications for increases in palladium mine output from South Africa and a strong belief that palladium scrap supply will not increase materially until the end of this decade. We are more generous on supply growth over the next three years and shall look to investigate this assumption further.

Controversially, GFMS believes auto inventories of palladium have been substantially run down over the past two years and are now nearly exhausted. We completely disagree and point to the ultra-low lease rates as evidence. GFMS also points to speculative interest in palladium as another bullish factor, while we see it very much as a threat. “Platinum Week” begins May 17, and we suspect anecdotes from the various sections of supply and demand will disappoint market expectations of a significant improvement in fundamentals in favour of palladium.

— The opinions presented are the author’s and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com. Queries may be submitted to the author at kamal.naqvi@barcap.com