The white-hot white metals

Platinum and palladium, also known as the white metals, are having an excellent year. Platinum has gained 10% to around $1,460 an ounce, while palladium is at a 13-year high of $850 an ounce. Rising demand and supply worries suggest there is plenty of scope for further gains.

The key source of demand for both metals is the car industry, where they are used in catalytic converters: platinum is used in diesel engines, for which the biggest market is Europe, while palladium goes into converters for petrol engines. In addition, both metals are used for jewellery.

Today, stricter environmental standards and wealthier consumers are ensuring that both markets continue to grow. Platinum demand has expanded by an average of 3% a year over the past ten years, and is set to grow 6% this year, according to Société Générale.

On the supply side, the important trend has been falling mined supply in South Africa, the leading platinum producer, and Russia, the biggest palladium supplier. Meanwhile, as stockpiles have fallen, both markets have slipped into deficit. The platinum market will be in deficit to the tune of about 1.2 million ounces this year, the biggest shortfall in 40 years.

Mined supply has been squeezed by a five-month strike in South Africa, which accounts for two-thirds of global platinum production and is also the second-biggest palladium producer (the two metals are often mined together).

The strike is over, but the recovery will be very slow, while recurrent friction in industrial relations suggests further outages are all too possible.

Meanwhile, investors are concerned that Russia’s Norilsk Nickel, the world’s biggest producer of palladium and nickel, could be hit by sanctions if the Ukraine crisis continues.

Car production is also rising strongly. Standard Bank estimates that China alone will produce 20.5 million vehicles this year, requiring a 15% increase in palladium needed for converters. European vehicle production is up by 20% since 2009, while American car sales are on track for their best year since 2007. So the outlook for demand remains bullish.

By this time next year, platinum could have reached $1,635 and palladium $900, reckons Capital Economics. Investors can spread bet on these volatile metals or track the price with London-listed exchange-traded funds (ETFs – PHPT for platinum and PHPD for palladium).

Merryn

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