Palladium Prices To Eventually Top Platinum, But Not Yet

New York (May 9)  The GFMS team at Thomson Reuters looks for palladium prices to eventually move above those for sister metal platinum, although analysts expect the latter to hold up for now and rally back above $1,000 an ounce in 2017.

Platinum’s supply/demand picture was roughly balanced in 2016, although the metal may move back into an annual supply deficit this year, GFMS said Tuesday in its Platinum Group Metals Survey 2017. Meanwhile, large deficits are expected to continue in palladium.

“Platinum has been the worst-performing precious metal in the year to date, continuing a pretty underwhelming performance in 2016,” said Ross Strachan, precious-metals demand manager at Thomson Reuters. “We do not expect it to continue to lag its peers substantially as the market has priced in much of the bad news, notably with respect to diesel usage, and it is starting a recovery, albeit a cautious and difficult one. We are looking for a fundamental deficit this year as mine production continues to be hindered by the lack of investment in earlier years.”

Meanwhile, the palladium market continues to tighten, which likely will mean more bouts of higher lease rates, Strachan said. While GFMS said the metal could be “susceptible to a short-term correction lower,” the consultancy firm also looks for prices to be “in excess of $850” before the end of the year.NYMEX June platinum futures last traded at $905, an ounce, down 1.59% on the day; at the same time palladium futures was at $796.20, down 1.16% on the day .

The price differential between the two metals recently fell to around $100 an ounce. The main industrial use for both metals is auto catalysts, with diesel-powered vehicles requiring platinum and gasoline-powered ones tending to rely on palladium. Jewelry is another major use.

“In our view, it is more a case of when, not if, the palladium price will exceed platinum for the first time since 2001,” Strachan said. “However, we think that the recent move has been too far and too fast and platinum is set to rally to be above $1,000/oz this year on the back of weak mine output.”

Platinum In Balance During 2016

During 2016, the platinum market remained broadly in balance for the second year in a row, GFMS said. Analysts said neither overall supply nor demand changed materially last year as a sharp reduction in jewelry offtake was offset by an increase in usage for industrial and automotive applications. Furthermore, the drop in mine output was counterbalanced by an increase in scrap supply.

Platinum mine production fell by 2% in 2016 to 6.05 million ounces (188 tonnes), driven by lower production from South Africa’s five largest operations. This was due to stoppages, mine suspensions, and stringent capital allocation due to low platinum prices, GFMS said.

Global platinum jewelry scrap climbed 5% last year to an estimated 570,000 ounces (17.9 tonnes) despite a 6% decline in the dollar-denominated platinum price, GFMS said. The third straight annual rise was the result of a 15% jump in Chinese collections, to an all-time high, as slow-moving stock was returned for remelting, GFMS said. Further, auto-catalyst scrap rose by 5% in 2016, reversing half of the prior year’s losses, to reach 1.04 million ounces (32.4 tonnes).

Meanwhile, platinum consumption for auto catalysts rose by 2% to 3.3 million ounces (102.2 tonnes) last year, less than half the pace of palladium demand growth, GFMS said.  Platinum-jewelry demand declined by 12% in 2016 to 2.18 million ounces (67.7 tonnes). China accounted for the bulk of this contraction, hindered by a softer economy and market-share loss to yellow 18-carat jewelry.

Growth occurred in most other industrial segments in 2016, with a combined increase of 17% year-on-year. The most pronounced gains were recorded from the glass and petroleum sectors, the former boosted by new manufacturing capacity built in China. Moreover, chemical and the other industrial sectors also climbed, with the former benefiting from a recovery in capacity expansions in paraxlyene. The only outlier last year was electronics demand, which eased 2%, in part due to a drop in global personal-computer demand, GFMS said.

Palladium-Market Deficit Widens In 2016

The physical deficit in the palladium market grew by a quarter in 2016 to 1.20 million ounces (37.3 tonnes), GFMS reported. Adjusting for stock movements, chiefly exchange-traded-fund redemptions, the net balance widened to a deficit of 670,000 ounces (20.9 tonnes).

Mine production of this metal contracted by 2% to 6.57 million ounces (204 tonnes) last year as output fell in South Africa, Russia, and Canada, but was supported by the ramp-up of operations in Zimbabwe and the U.S., GFMS said. The closure of high-cost shafts in South Africa, processing constraints in Russia, and lower grades in Canada echoed some of the challenges faced by these countries in 2012, the consultancy continued.

However, the decline in mine output was roughly offset by an increase in scrap flows, from both auto catalysts and jewelry, GFMS said. Auto-catalyst scrap supply rose by 7% in 2016 to 1.72 million ounces (53.5 tonnes), which was the second-highest recorded level.

Meanwhile, palladium demand for auto catalysts climbed in 2016 for the fifth straight year, this time by 5%, to hit 7.36 million ounces (228.9 tonnes). The key factor was the robust pace of both global gasoline-powered auto production and sales. This was driven by tax breaks in China and increased market share for gasoline in Europe, and to a lesser extent an improving economy there, GFMS said. The 18% increase in Chinese offtake in this sector saw it overtake Europe to top spot for the first time, the consultancy added.

Source: Reuters