Monday, October 1, 2007

Platinum Palladium Spread

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.

Daily Pt and Pd charts

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 (000 ounces) for autocatalysts and jewellery.

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.

DISCLAIMER: Please do your own diligence. I am not responsible for your trading decisions, I am not an investment advisor/professional. This blog, is general market commentary only. It is not intended as specific advice. You should talk to your own investment professionals for specific advice.

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