We look at how Palladium & Platinum markets work
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Palladium and platinum form part of the Platinum Group of Metals (PGM), which also includes ruthenium, rhodium, osmium, and iridium. PGMs are highly resistant to corrosion and high temperatures, making them ideal for a wide range of industrial applications, especially in the auto industry.
The increasingly supportive macroeconomic background has buoyed the outlook for industrial demand for a range of metals, helping palladium and platinum climb back towards recent highs. Palladium has been the best performing metal over the past six months, gaining 56% to $837.25 ounces compared to a 20% gain in platinum.
Palladium and platinum prices
Demand for palladium and platinum is predominantly driven by autocatalyst manufacture in auto production. Palladium has been outperforming platinum since the end of 2008, predominantly due to increased industrial use, especially as Chinese manufacturers turn to palladium as a cheaper alternative to platinum, and the emergence of Exchange-Traded Funds (investment vehicles that track the price of the underlying) in North America.
As a consequence, global palladium supplies have been depleted at a faster pace than platinum in recent years. A surge in demand for both commodities prompted a significant supply deficit in 2000 when Russia, the world’s largest producer of palladium, limited exports of the metal. From 2009 onwards the supply surplus for both palladium and platinum fell sharply as global demand increased, which provides scope for further increases in price due to limited supply availability.
Seasonality of Palladium and Platinum
Prices for the two metals generally peak in April/May and December, with the intervening period seeing a general price decline (one particularly marked in palladium) due to the traditional summer shutdown that is common to car manufacturing companies. Jewellery demand may help to account for why platinum sees a less severe decline in the summer period, as India's jewellery consumption increases towards September's Diwali festival, while the run-up to Christmas explains increased prices in the final quarter of the calendar year.
Outlook
2010 has seen an impressive rally in both platinum and palladium prices. This has been driven by fundamental factors of supply and demand, with the car and jewellery sectors continuing to consume the metals in ever-increasing amounts. These trends are not likely to disappear in 2011, with emerging market growth looking set to continue for the foreseeable future, despite the threat of further monetary tightening. In addition, a recovery in the economies of the developed world will see demand from these regions strengthen. As supply remains tight, the outlook for palladium and platinum prices remains bright.
However, the recent spike in oil due to political turmoil in Libya threatens to derail the global economic recovery and reverse the recent trend in the platinum:palladium ratio. Platinum consumption is heavily driven by jewellery demand, while palladium is more strongly linked to the recovery in auto sector. This means that platinum is likely to outperform palladium during periods of risk aversion or economic contraction.
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