Thursday 15 June 2017

Is a 'Palladium - Platinum price inversion' in the cards?

A 'Palladium - Platinum price inversion' is it conceivable? Well, there has been a precedent:

Near the end of the 20th century, the days of cheap Palladium were numbered. Norilsk used to have ample Palladium supply after starting up its large Russian nickel mine. As the supply overhang disappeared in the late 1990's, the Pd price surged. Remember that gold quoted near its bear market bottom at that time. It didn't take much time for Palladium to leave behind gold. During 1999 Palladium was challenging the Platinum price, occasionally surpassing it on its rocky ride to the top.

At the turn of the century, Palladium ultimately overtook Platinum, though Pt was in an uptrend itself! Palladium was to spike at $1080 on Jan 22, 2001, over 70% more expensive than Platinum and over 4 times the gold price ($266.1/oz) which was close to its bear market bottom. The extreme Pd surge cooled down in autumn 2001 when the metal slid beneath the platinum price. Palladium would challenge Platinum once more near the end of 2001, however without surpassing it.

Platinum price (blue) and Palladium price (red) both in USD/oz
20th century prices are monthly averages. From Jan 2000 till end Dec 2001, there are daily observations
The economic recession that followed 9/11 and the tech stock crash caused industrial consumption of both PGM's to dwindle. The fairly overvalued Palladium took the larger price hit.  Yet another year lapsed before the rising gold price drew the final curtain on the Palladium surge. From spring 2003 till after summer 2005, Palladium bottomed below $200/Oz. On Sep 5, 2005 an ounce of gold bought 2.44 Oz of Palladium and an ounce of Platinum even bought close to 5 Oz of Palladium.  During the following decade and till now, Palladium prices would continue to be much more volatile than those of gold or silver and even platinum.

Supply and Demand

During 2015 there was an inventory draw-down for both Platinum and Palladium, since global demand exceeded global supply.

The global mine production volume of Palladium 6.426 M Oz continues to be higher than that of Platinum (6.076 M Oz in 2015).

No less than 75% of the Palladium total supply is used for catalytic converters for gasoline engines. The off-take even exceeds primary mine supply, making demand depend also on recovery from spent catalytic converters (2.460 M Oz in 2015).

Catalytic converters for diesel engines require Platinum. However that only amounts to about 40% of the total Platinum supply.  Consumption is much more varied in several industrial applications and in jewelry.  Hydrogen/Oxygen fuel cells require platinum catalysts.  These fuel cells rival high duty lithium/cobalt batteries for electrical vehicles.  Fuel cells are much lighter and may considerably extend vehicle autonomy.  

The Platinum recovery from scrapped catalytic converters amounts to 1.725 M Oz. This is considerably less than that of Palladium.

Current situation

On June 15, 2017 Palladium closed at $863/oz, barely $59 less expensive than Platinum ($922/Oz).

If a 'Palladium - Platinum price inversion' is to follow, it won't probably be due to a sudden supply disruption for palladium only, without affecting platinum supply.  The 1990's event won't be repeated.

The price inversion potential depends on a number of simultaneous assumptions mainly involving total demand:
  1. An ever increasing global output of cars running on gasoline
  2. A continuing decline in the market share of diesel cars
  3. Crude oil will remain widely available at moderate cost for decades to come (less assumption 1 won't materialize)
  4. Suppliers won't redesign catalytic converters substituting too expensive palladium by platinum. Catalytic converters with platinum can also be used for gasoline engines.
  5. Electric vehicles fail to reach a critical market share, making them sufficiently attractive from a price/operating cost point of view
  6. The niche of electric vehicles continues to depend on rechargeable lithium/cobalt batteries only; hydrogen fuel cells never become a viable alternative.
All of these assumptions don't need to materialize: yet a majority of large speculators should be convinced they will and act accordingly.  Possible? Yes, but it's not my bet.

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