Roller-Coaster for the PGMs

It was a roller-coaster week for the PGMs. After a government mediation failed to reach an agreement between the unions and mining companies to end the longest mining strike in South Africa, palladium rose further to 862.5$/oz. Thus palladium traded higher than in late February 2011 and reached the highest level since February 2001. Also platinum rose, but remained below the high of the year, which was reached at 1,493.90$/oz on May 22.

However, after reports emerged that a wage deal might be in reach, both PGMs came under pressure and posted strong losses. It was a bit of buying the rumor and selling the fact, but it is at the time of writing just a hope that the mining strike will be over soon.

According to GFMS, the demand for palladium exceeded supply in 2013 by more than one million ounces. South Africa contributed 2.35 mil ounces to the total mine production of 6.4 mil. Ounces. Scrap recycling added another 1.9 mil ounces to the total palladium supply. With the long lasting strike, the mine production in South Africa is expected to fall significantly short of last year’s level. Thus, overall palladium supply should be lower in 2014 than in 2013. In late April, GFMS estimated that 0.6 mil ounces were lost due to the strike. Thus, when workers return back to work, the total loss could come close to 1 mil ounces. At the same time, the recovery in the European automotive sector points to an increased industrial demand. Therefore, the supply deficit might rise to 2 mil ounces or above.

From the high reached last Wednesday, palladium lost more than 50$/oz. In the short run, the price of palladium might retreat further. However, with the outlook for a higher excess demand, palladium should be well supported.

One question often asked was about the size of the price increase since the start of the year. Many commentators had expected a stronger rally given the duration of the strike. One possible answer is that palladium consumers hedged their demand right in time with options. In this case, the short seller of the option only needs to buy incremental amounts of palladium according to the change in the option delta to remain hedged. Another possibility is that consumers expected that prices would decline again after a wage deal is reached. They can secure physical palladium by lending from holders of palladium inventories, which do not need the metal for immediate consumption. These are mainly financial institutions and investors.

The rise of palladium to a new multi-year high had also a positive impact on gold and silver. All four precious metal have a common usage in the jewelry industry. Thus, they are to some degree substitutes. A rise of the price of one metal relative to the others is increasing the attractiveness to use one of the other metals as a substitute. Thus, the rise of the PGMs increased the attractiveness of gold in the jewelry industry. This explains that the rally of the PGMs at the middle of the week also pulled gold and silver higher. Also quantitative models (VAR) show that there is a stronger link between gold and platinum prices and a stronger link between silver and palladium.

Then the question arises, why did gold and silver prices increased further while platinum and palladium plunged? From our point of view, the answer is the recent geo-political developments in the Middle-East region. With the ISIS terror group gaining control over Mosul and moving towards Bagdad, the markets got surprised. Oil markets fear that the rebels gain control over Iraqi oil exports. Stock markets fear a negative impact on global growth and turned lower, with weaker than expected US economic data being another reason for taking profits. Thus, gold and silver remained in demand as a safe haven, while the PGMs sold off.