FT: Palladium underperforms global markets' laggards
In a dismal month for global markets, one of the worst performers may come as a surprise: palladium plunged more in May than Spanish banks, BP shares or the euro.
The heaviest losses came just as platinum and palladium’s leading lights congregated in London for the industry’s annual gathering two weeks ago.
In two days, palladium plummeted 16.6 per cent while its sister metal platinum tumbled 9.5 per cent.
The sharp falls underline the role now played by investment demand for the metals, which until recently were mainly used industrially in the manufacture of catalytic converters thatclean vehicle exhausts.
The price drop also crystallised concerns among some in the industry that the whims of investors, rather than supply and demand fundamentals, were moving prices, leading to higher volatility.
A senior banker summarised the mood at the London meeting, saying: “You have a real problem when you sit down hedge funds managers and miners on the same table and the former, who invest, are more bullish than the latter, who sell the stuff.”
Peter Ryan, senior consultant for precious metals consultancy GFMS, said he was concerned by the “level of exuberance” among investors in the metals.
Many in the industry believe that prices have overtaken the speed of recovery in the car market – palladium more than tripled in value between the start of 2009 and its peak in April while platinum rose 90 per cent.
Bob Gilmour, of Impala Platinum, the miner, says: “[Prices] probably ran up a bit too fast – we got a bit ahead of ourselves.”
The growth in investment has been driven by new products – notably the launch in January of US exchange-traded funds (ETFs) that hold the physical metals – which have allowed mainstream retail investors access to the metals.
ETFs now hold 1m ounces of platinum, up 53 per cent since the start of the year, while holdings of palladium have grown 55 per cent to 1.8m ounces. That represents, respectively, a sixth and a quarter of annual mine production.
The rise in investment is linking platinum/palladium to gold, even though they share little beyond their precious metals label: they are mined in different places and their industrial uses are markedly different.
Some fear the buying trend could turn into a flood of selling one day.
Gavin Mackay, of Aquarius Platinum, in contrasting jewellery to investor demand, says: “Once it goes around the neck of a Chinese lady, it is not coming back on to the market.”
He adds: “We are just a little worried that, if there’s a very nasty shock, the ETFs will prove to be an above-ground mine.”
But Johnson Matthey, the precious metals refiner, believes ETF investors are “taking a longer term attitude – not looking for a quick return”.
Last month’s falls give some support to that view: they were mainly driven not by ETF investors running for the door but rather by the liquidation of positions held by “fast money” investors, such as hedge funds, who had placed record bets on continued gains in prices, according to the Commodity Futures Trading Commission.
Suki Cooper, precious metals analyst at Barclays Capital, says the lack of significant ETF outflows shows that ”longer term interest has remained robust”.
That is justified, analysts and traders say, as the outlook for both metals appears strong.
In South Africa, which produces three-quarters of the world’s platinum, little supply growth is forecast as the country’s utility, Eskom, is struggling to supply power to the mining sector.
Some analysts – and many hedge funds – believe that the start of the World Cup this month could overload Eskom, triggering blackouts for the mines.
Moreover, much of the remaining viable platinum reserves are in Zimbabwe, where the political situation has deterred investment.
Meanwhile, many believe the Russian government’s sales of its stockpiles of palladium, which have kept the market well supplied for years, are coming to an end.
Viktor Sprogis, deputy chief executive of Norilsk Nickel, the world’s largest palladium miner, says: “We suppose that the government stockpiles of palladium are gone.”
On the demand side, the recovery in the global auto industry, combined with an increasing push for regulation of vehicle emissions, makes the outlook seem bright.
“Fundamentals really do point to a continued rise in the price,” says William Biggar, chief executive of North American Palladium.
As for the growth in investment, many in the industry take a philosophical approach. “You’ve just got to be stoical about it,” says Bob Gilmour, of Impala.
