LAWRIE WILLIAMS: Palladium/platinum premium to persist – Metals Focus
In its latest newsletter, London-based precious metals consultancy, Metals Focus, comments primarily on its conclusions from meetings, discussions and presentations at thje recent Platinum Week in London.
Perhaps the most significant comment for followers of the platinum group metals (pgm) market, in our opinion. is that the consensus view was that palladium’s premium over platinum would not be challenged ‘for years to come’. Fundamentals for the two major platinum group metals remain strongly tilted in palladium’s favour and although there are down the line risks, supply and demand predictions suggest that the palladium price will continue to be elevated, while platinum supply and demand, and thus the price, is much more balanced. although sentiment for platinum appears to be improving. The consultancy feels that the price premium for palladium is here to stay - perhaps until fully electric or fuel cell powered automobilles begin to dominate the new light vehicle market. But this may not happen for a number of years yet.
One thing which could change all this is the hotly-debated subject of possible reverse substitution. Followers of the pgm market will be well aware that palladium’s dominance as an emissions control catalyst for petrol (gasoline) engined vehicles came about because of platinum’s then big price premium over palladium. Now the positions are reversed many believe that the opposite may come about, but Metals Focus disagrees. It stands by the view “that technical constraints, limited budgets and uncertain cost benefits will all limit the extent of any such shift, making a noteworthy change in the two metals’ medium-term fundamentals unlikely any time soon.” But of course ‘medium-term’ is something of an undefined period of time.
Certainly advances in exhaust control technology over the past several years mean that the current palladium/rhodium exhaust control catalysts are far more efficient than the old platinum-based ones, so a switch back to platinum would not be a simple process. However we suspect that catalyst manufacturers will currently be conducting research to see if palladium’s current technological advantage in this field can be overtaken by an improved platinum-based version. Of course the ‘Catch 22’ position here is that if successful then there could be a swift turnaround in supply/demand fundamentals making platinum the more expensive metal again. That is a major obstacle in the current reverse substitution argument.
Overall though, the Metals Focus analysts cane away from Platinum Week with the feeling that the sentiment towards pgms is getting stronger – despite some current intra-day price weakness affecting both major pgms adversely. Metals Focus commented specifically on a perceived better outlook from the producers which its observers attributed to better basket prices being achieved. Although platinum itself may have been a little lacklustre, the producer mix has been better driven by high palladium and rhodium prices – all the major platinum producers mine these metals too, while of course the primary palladium miners will have been doing particularly well of late.
The consultancy even noted ‘cautious optimism’ for the platinum price itself which it says supports the view that the platinum mining sector may still see growth going forward. Metals Focus has gone on record recently with the opinion that a rising gold price will pull the platinum price up with it, but while gold’s performance over the past month or so has been weak, most observers are still looking for a strong kick upwards in the second half of the year.
With the palladium price having been knocked back recently, its premium over gold has been slipping, possibly confirming our expressed view that this premium may turn into a deficit from time to time during the year. It has already done so once, exceedingly briefly, a couple of weeks ago and with palladium’s spot price lurking below $1,300 as I write, it won’t take much of an upwards kick in the gold price to bring the yellow metal’s historic premium over palladium back into play.
But so saying, palladium’s fundamentals are continuing to look strong. Even if there is reverse substitution of platinum for palladium in petrol engine exhaust control catalysts ahead, any such substitution would be perhaps still a couple of years into the future, so for the time being the prospects for the palladium price continue to look strong. As Metals Focus puts it “ in spite of easing physical market conditions, substitution risks and scope for hidden inventory releases, most market participants remain bullish on palladium in the medium-term. While views diverged as to whether the current respite is over, there was a clear consensus that eventually the palladium price would once again start rallying, that the leasing market would tighten and that its premium over platinum would not be challenged for years to come.”
In our view the major threat to palladium’s current market dominance is the accelerating take up of light automobiles driven by non-polluting drivetrains, but it may well be some years into the future yet before this becomes a major issue. Perhaps more worrying is the seeming global downturn in automobile sales, although for the moment this is being counterbalanced by ever increasing regulatory exhaust emission controls requiring higher catalytic loadings. Meanwhile platinum demand could be boosted by a pick-up in demand for diesel-engined vehicles (for which platinum is the preferred catalytic metal) as manufacturers successfully work on cleaner diesel engines. However it will take time for the stigma currently attached to diesel to fade into obscurity.
23 May 2019