Tuesday, October 20, 2009
Tuesday, August 19, 2008
Monday, October 1, 2007
The Platinum/Palladium spread is a ratio of very much interest for PGMs analysts and traders but there is not much freely available litterature about it. I will try to analyse it in this post from an historical, technical and fundamental point of view and I will finally try to make some hypothesis on its future direction.
The first chart below shows the historical values of the ratio Platinum price/ Palladium price (also simply known as Platinum Palladium spread) while the second chart below shows the historical values of the difference Platinum price - Palladium price (also simply known as Platinum Palladium Premium):
It is very interesting to note that the Platinum Palladium Premium is trading at its all time high these days while the Platinum Palladium Spread is still far from its all time high of July 1968 when the Platinum price was almost 7 times the Palladium price (292/42).
Palladium and Platinum have roughly the same level of mining supply per year (around 7 million ounces in 2006 and 2007) and are consumed mainly by the same consuming industries ( autocatalysts, jewellery, electronics).
Platinum has historically been more expensive than Palladium, as much as 3 or 4 times on average from the fifties to the nineties. Palladium was more expensive than Platinum only during the Russian supply crisis of the late nineties: from January 2000 to July 2001 Palladium traded higher than Platinum on uncertainties over Russian exports and emergency stockpiling of north American automakers. Once the year 2000 supply crisis was over, the historical trend of significant Platinum richness over Palladium was quickly re-established: that was the trend for the last 6 years.
Today the price of Platinum (almost 1400) is exactly 4 times as high as the price of Palladium (almost 350) and the Platinum Palladium premium stands at 1050.
The very high level (all time high) of the Platinum-Palladium premium is drawing some attention to the question whether such Platinum richness over Palladium may promote among PGM users and consumers a switch trend toward Palladium.
Having a look at demand/usage forecasts of PGM producers such Implats and Stillwater Mining for 2007 it looks like Palladium cheapness is already creating substitution trend in jewellery and in the autocatalyst sector. The CEO of Stillwater Mining at the Denver Gold Forum in late September forecasted a record year in 2007 for Chinese Jewellery demand for Palladium (up 25% from 1 million ounces to 1,250,000) and a reduction of Chinese Jewellery demand for Platinum (down 10% from 780K to 700K ounces).
The charts below shows the Palladium vs Platinum substitution trend which is taking place analysing annual demand of Palaldium (
The switch to Palladium of important segment of PGMs demand such autocatalysts and jewellery is suggesting me that the trend of Platinum appreciation versus Palladium may be close to a pause or correction in the coming years. The most important factor pressuring on the downside Palladium vs Platinum is the issue of the Russian Palladium stockpiles which I have already analysed in my previous post. If I am right an the existing Palladium stockpiles are lower than believed the price adjustment between Pt and Pl may take place sooner rather than later . In any case, once the Palladium stockpiles will be finally depleted, regardless of their size, the most important factor holding down the price of Palladium will be removed and the Platinum Palladium Premium will correct severely in my opinion.
Thursday, September 13, 2007
The common view and consensus in the market is that there are still significant stockpiles in Russia and that part of those stockpiles are now held in Switzerland, this consensus is one of the main reason that make most of the analyst neutral or slightly bearish on the Palladium fundamentals despite growing demand and contracting mining output.
Despite the bearish analysts consensus view, the price of Palladium has been rising for two years and this is in sharp contradiction to the bearish consensus on its fundamentals, since I believe that the market price of a commodity is an efficient indicator of its fundamentals I have started to question the analysts bearish consensus and I decided to do some further research in order find out more about the actual level of Russian palladium stockpiles: either the analysts are wrong or the Palladium price is wrong.
Some interesting observation on this subject are also found on a friend’s blog, however I would like to add to this friend simple and straightforward observations some analytical data and produce a rigorous fundamental study on this matter.
To start my research first it is necessary to find a certain level Russian stockpiles in a particular year in order to study flows of metals from that particular year in and out of Russia. The most reasonable starting year must be year 2001 since there is a quite broad consensus on the levels of Russian stockpiles in that year. It is well known that Valery Rudakov of Gokhran in 2000 said that the Russian stockpiles were approximately 6 -10 million ounces at that time (I will assume 8 million ounces right in the middle of the range) and it is also well know that in August 2001 Norilsk Nickel suspended for the rest of the year sales of Palladium in the spot market stocking probably up to a couple of million ounces. Using the above information it can be assumed that at the end of
Now I will use Russian Palladium production data and Russian Palladium export data from 2002 to 2006 to estimate the change of the Palladium stockpile level: it must be noted that Russia does not provide exports data of Palladium, however, the rest of the world releases import data of Palladium from Russia so the export data can be worked out.
I will also analyse the destination countries of the Russian palladium export since some of then are end users of Palladium (i.e. they consume the imported Palladium) others are not end users and may trade, transform and resell or simply restock the metal.
The chart below shows the de-stocking process implied by the net difference between Russian export and production of Palladium.
The chart below shows the resulting change of level in the Russian stockpiles of Palladium.
Accordingly to my calculations the stockpiles of Palladium in Russia are 3.1 million ounces at the end of 2006: these 3 million ounces are probably held by the Russian central bank since it is known that Norilsk Nickel has no stocks left.
Now it is crucial to analyse from customs data where the Russian exports of Palladium from 2002 and 2006 went: the table below shows the breakdown of Russian exports by destination accordingly to importing countries customs data (in ounces):
The main importer of Russian Palladium export is USA (7 million ounces) followed by Switzerland (6.8 million ounces) and Japan (4.8 million ounces): USA and Japan consume Russian Palladium mainly to produce autocalysts, as well as Korea. Italy is a car manufacturer country and a jewellery country. UK has imported 1.2 million ounces of Russian Palaldium, but the bulk of it was shipped to USA as payment for Norilsk acquisition of Stillwater Mining in 2003. China is also an importer of Russian Palladium and ots imports are already significant if counted together with Hong Kong imports (China+ Hong Kong imported more than 600K ounces from Russia) and I expect China to become within 2-3 years the main importer of Russian Palladium.
The anomaly of the above data is Switzerland since it is not and end-user/consuming country but a hub for international transactions in palladium. During the last 5 years Switzerland imported 6.8 million ounces from Russia, the consensus view of the analysts community is that the bulk of it is owned by the Russian central bank and it is just in Swiss custody, if that was true, then Russian stockpiles would still be 10 millions ounces as well as in 2000, however I do not believe to this consensus, so I made some further analysis of the Swiss Customs data on flows of Palladium.
I have collected and analysed Swiss import and export data of Palladium from 2002 to 2006 with its main trade partners in order to figure out where are now the 6.8 million ounces of Russian Palladium supposed to be held in Switzerland vaults, the results of my analysis are very interesting as shown in the table below:
From 2002 to 2006 Switzerland has been a net exporter of Palladium: 1.4 million ounced were shipped to Hong Kong ( therefore China through Hong Kong has bought directly from Russia and indirectly from Switzerland as much as 3 million ounces of Palladium in the last 5 years). Switzerland has also shipped a net 1 million ounces to US and 600k to Japan. Summing the net export (Export-Import) it looks like Switzerland has been a net exporter of 3,4 million ounces of Palladium from 2002 to 2006.
Using the above data it is clear that now Switzerland has only 3,4 million ounces left of the original 6,8 million ounces imported from Russia. It must also be noted that not all of this remaining 3,4 million ounces of Palladium left inside Switzerland belong to Russia: part of it may have well changed hands: Switzerland launched in
The level of Russian stockpiles has been shrinking significantly over the last few years, there may be, accordingly to my calculations, no more than 3 million ounces left inside Russia and approximately a couple of million ounces left in Switzerland: the Palladium market has absorbed unnoticed the Russian destocking of the last few years and has been trending higher, a sign of an incredible underling strength. The level of the stocks left is just worth 10 months of yearly Palladium mining output, with increasing demand coming into the market from China I am very bullish on the Palladium prospects despite the bearish consensus out there.
Friday, September 7, 2007
But what about the PGMs outlook? There is little or no literature about the PGM expected peak production and reserve average life estimate, this is quite strange considering that PGMs are the most rare metals on earth, and their usage is widespread and vital for the world economy.
Considering as an anomaly this lack of information and material about the PGM reserves life outlook, I decided to do some elementary (I am not a geologist) calculation and estimate. I will focus on Palladium reserves in this study.
The starting point of my research is the current USGS estimate of existing PGM reserves reported in the table below:
The USGS defines reserves (reported in kilograms in the above table) as the part of the reserve base that could be economically extracted or produced at the time of determination. The term reserves need no signify that extraction facilities are in place and operative.
Starting from this data I have tried to estimate the existing world Palladium reserves in Troy Ounces from the above PGM aggregate figures: I assumed that 77% of North America PGM reserves consist of Palladium, 85% of Russia PGM reserves consist of Palladium and 30% of the South African and rest of the world reserves consist of Palladium. It is known that deposits in the North hemisphere are Palladium rich and in the southern hemisphere are Platinum rich, following the calculation based on these assumption I obtained the table below for the existing world Palladium reserves (in troy ounces) as base for the successive estimates.
It must be noted that 2006 reserve estimate is the highest ever reported from the USGS.
To estimate the production figures for the upcoming years I used the following annual output growth rate: 3% for South Africa, 1% for North America, 2% fro Russia and 5% for the rest of the world. It must also be noted that South African, North American and Russian PGM producers are predicting mining output growth in excess of 5% for the next years, if that was the case, then my estimate for the depletion of reserves would result too conservative. Most PGMs producers however have a bad track record as far as their ability to match their growth promises is concerned, for this reason I am more confident with my slower rate of growth estimation.
Using the above assumption and existing world reserves as starting point of my analysis I found a very surprising and alarming result: Palladium reserves may run out at the same time of oil reserves. The chart below shows the world Palladium reserves (in thousands) and their gradual depletion over the next 50 years. US reserves may be over by 2046, Russian reserves by 2041 and South African reserves by 2080. It must be noted that output rates may decrease with diminishing reserves so the actual chart may look more bell shaped than my estimate chart.
What can change this outlook?
-Best case scenario: new deposit are found (for example exploration companies are searching for PGM in Alaska and Finland), higher PGM prices increase the existing reserves (the upside is small however since the USGS estimates that existing PGM resources are just 20% higher than reserves). In this scenario we will run out of PGM later than my estimate.
-Worst case scenario: no major deposits are found and producers increase their output faster than my estimate, in this case we will run out of PGM sooner.
It looks like a sound long term investment to be long and hold into the next decades PGM producers and PGM exploration companies as their reserves will become more and more scarce their will be also more and more valuable.
Thursday, September 6, 2007
As far as the nominal amount is concerned, it is clear from the above chart that the Palladium market is characterised by long period of excess supply followed by long periods of excess demand: it is rarely balanced and this fact alone explains the high level of volatility of the Palladium price.
The cyclicality of the excess demand/excess supply in the Palladium market is more evident when the data are charted as percentage (of the supply). The large and prolonged % surpluses of the thirties may be explained with the weakness of the economy during the great depression while the recent large % deficit of the nineties with the excess demand created by the autocalysts sector.
Finally the chart below seems to confirm that the Palladium price looks like a lagging indicator of changes in demand.
Demand breakdown: the chart below shows Palladium demand by application over the last 25 years: the price spike of 2000 and 2001 forced consumer industries to look for substitution metals and to switch their demand to Platinum: particularly in the autocatalysts and electronics sectors.
I believe that the current Platinum-Palladium price spread very favourable for Palladium will reverse this trend pushing for more substitution from Platinum demand to Palladium demand especially in the autocatalysts sector: this predicted increase in substitution demand, the increasing Palladium investment demand and the additional demand coming into the market for new Palladium application in an environment of decreasing rate of growth of Palladium mining output should bode well for Palladium price outlook in the coming years.