Commodity Focus: Platinum-Gilded Rollercoaster

Those killer roller coasters at Six Flags are tame when compared to the precious metals markets. Soon recyclers will demand employees with rodeo experience—able to ride a bucking bronco—for any openings in the metals markets.

The wildest ride of all has been with the platinum-group metals (PGM). As of this writing, platinum was at the top of a long climb. Fasten your seatbelt—palladium is taking a dizzying dive down, and it may not have bottomed yet. Its early April price of $180 per ounce is a long fall for a metal that was moving close to $1,100 a couple of years ago.

Add to this dizzy market the confusion over the disparity in PMG volume figures as published by several firms, and it all comes out to a real fun-house adventure.

A RAPID PULSE. The Iraq war put the gold markets in a whirl, although some observers say the market had already built into the price of gold such factors as likelihood of a protracted war. Only silver has stayed out of the precious metals fun house, maintaining a steady flat price.

Perhaps most perplexing was the sudden run-up in the platinum market, apparently brought on by government announcements that there would be stricter standards for diesel vehicles, and that there would be programs to emphasize development of fuel cell-powered cars. Looking ahead of the market is one thing, but fuel cell-powered vehicles are way, way down the road, most observers agree.

What else can account for the skyrocketing price of platinum? In 2002, demand for platinum exceeded supply for the fourth year in a row, so the market anticipated a price increase. By mid-October, 2002, platinum was testing $600. This was based on reality—the fundamental strength of market demand meant both new and recycled platinum would be in demand.

Forecasters in Johnson Matthey’s Precious Metals Division figured the price would cruise along between $550 and $650 into mid-2003.

But this was no time to be sitting in your seat waving your hands above your head. The market forgot about the $550s, and the spot price of platinum tested the upper end of the predicted range, nudging $650 by April.

The wild ride got off to a quick start at the end of February when Standard Bank London said that tighter vehicle exhaust emission standards and growth in demand for diesel cars would do great things for the market. This, despite the fact that supplies from South Africa, the world’s top producer, are expected to increase. Standard Bank’s annual Platinum Yearbook projects that physical availability of platinum would stay tight.

Standard Bank forecasts platinum to trade between $580 and $720 an ounce this year. That contrasts to an average 2002 price at $540.03.

The result was a surge in spot platinum to the $680-$707 an ounce range…a 23-year high.

Ashok Kumar, director at A-1 Specialized Services & Supplies, Croydon, Pa., one of the world’s largest PGM recycling firms, thinks the numbers presented by Standard Bank were misunderstood. "They never explained that their numbers included electronic stocks," Kumar says.

Even with all the controversy, Kumar sees a sizable run-up coming in the recycling of platinum and palladium. "I think we’ll see a huge amount—up to three times as much palladium in 2008 as we will see in 2003," Kumar says. He is projecting 1.5 million ounces recovered from auto catalysts and another 1 million ounces from electronics.

"That tells the industry that they do not have to stockpile," Kumar says.

With the run-up in platinum prices, some auto manufacturers switched from $600 platinum in catalytic converters to $200 palladium.

The drop in palladium prices was exacerbated by the run-up in nickel prices. Miners, especially the Russians, are delivering on a timely basis. With nickel prices cresting a very nice price wave, miners are digging more nickel and thus extracting more palladium.

"One reason why the numbers have changed so quickly is because we at A-1 found that our earlier forecasts were below secondary supply levels in 2001," Kumar says. In 2000 they predicted 600,000 ounces of platinum would be reclaimed in 2001. The actual total was 700,000 ounces.

"For palladium we fairly successfully forecast 300,000 ounces, and for rhodium we were relatively accurate with our 100,000 ounce prediction," Kumar adds.

Part of the problem tracks back to the difficulty of gathering figures, explains Jeremy Coombes, general marketing manager for Johnson Matthey in London. "We study demand for PMG metals and look at recycling. We take into account the amount of PMGs that is in a recovered product and the amount that is newly mined."

The easiest industry to deal with, Coombes says, is the glass industry. While PMGs are not used in the actual product, platinum is used to channel molten glass. After a while, the platinum degrades. It is recycled, re-refined and reworked. It never sees the open market. Some new platinum goes into the new piece. Only that number is put in Johnson Matthey’s figures. The auto industry is a second big factor. Numbers come from the major collectors and, while less accurate than the glass figures, are reasonably accurate.

Where the trouble comes in, Coombes says, is in the electronics area. "It is very difficult to measure how much PMG is recycled from electronics," he says. "We don’t have confidence in those numbers to put them down as a separate line item." Shipments are difficult to track. Refiners are loathe to provide outsiders recovery or purchase figures. Firms like Johnson Matthey do estimate recovery from telephone exchanges, which are dismantled and recovered from TVs and computers. But the bottom line is only a best-effort figure. For that reason, Johnson Matthey does not break out recovery from electronics, while they do publish automotive figures.

A-1 sees worldwide volume of recycled platinum at 720,000 ounces last year. They peg recycled palladium at 300,000 ounces and rhodium at 100,000 ounces. These figures are slightly above 2001 levels.

Despite the greater than expected influx of salvage converters, however, A-1’s palladium and rhodium forecasts were on target, because palladium and rhodium per-salvage-converter loadings were lower than expected.

"One plausible explanation is that published automotive demand for the relevant years exceeded actual consumption due to stockpiling by vehicle manufacturers and their vendors," Kumar offers.

A-1 does not see a lot of palladium coming through for recycling yet, but expects continued growth of recycled palladium over the next two or three years.

"Look at the total basket," says Coombes. He says that it is not the individual metal prices that determine what a converter fetches. "I think dealers apply a basket price to what comes in."

By this, Coombes means that, when the truck goes around, the buyer has a general knowledge of how much platinum, palladium and rhodium were in the previous week’s shipment. Using those averages, the buyer sets prices for the current week’s purchase. A more precise method may be available soon. (See sidebar.)

Standard Bank says a push for tighter emission standards will sustain demand from the auto catalyst sector. It says that U.S. automakers are going to be scrounging for platinum, having all but exhausted stockpiles. "Platinum will also benefit from increased loading on auto catalysts fitted to diesel engines, as drivers, particularly in Europe, look for more efficient motoring," the report says.

While Johnson Matthey says there is potential for continued growth in the demand from the Chinese jewelry sector, Standard Bank is less optimistic. "The market is known to be price sensitive and a platinum price constantly above $600 could severely test this sensitivity," according to the Standard Bank report.

PALLADIUM. "Today, the palladium price is more important than the platinum," Coombes says. This is because scrap dealers are seeing cars from the early 1990s, and this is when Ford started the big move to palladium in converters.

"The prospect for the next five to six years is more palladium and not much more platinum," Coombes says.

Palladium was headed for an eight-year low, according to Johnson Matthey’s Precious Metals Division. It predicted a drop in demand through 2002 of 28 percent. Despite the lower palladium prices, there was little recovery in dental or electronics demand.

Russia produced slightly less than 100,000 kilograms of palladium in 2002, helping keep the price from slipping below $320 per ounce in late 2002. Johnson Matthey said the expected possibility of increased Russian sales in 2003 would act as a price buffer in the short term, keeping Palladium in the $250-$330 range.

Yet, spot prices for palladium were at $181 early in April, dropping from $187 in late March. Standard Bank was projecting a 2003 price for palladium in the $180-$280 an ounce versus an average 2002 price of $336.66. Spot palladium plunged to a five-year low of $222.00 per ounce in December 2002 from more than $1,000 in January 2001. The amusement park ride could be blamed on the Russians. Usually the top producer of palladium, Russian supplies of palladium were as erratic as any thrill ride. That pushed most consumers to change over to platinum (which, at that time, was the cheaper option).

Kumar says he sees platinum trading in a $600-$650 range, palladium hovering around $150-$250 and rhodium bouncing between $450 and $650.

Coombes says that, while the larger fraction and lower price of palladium may drop the value of the individual converter, overall the flow of converters should continue to grow.

"Over the years there is a greater awareness of the value in converters," he says. "Our projection is that there will be continued growth in the recovery of metals."

The palladium price crash will also have an effect on the gold market.

Yet, like any decent roller coaster, the gold market had its ups and downs, dropping $20 at one point in March.

The Iraq War sparked some demand for gold. On the other hand, recyclers like Kumar feel that the electronic and dental market may take notice of the $180 palladium prices and look to it as an alternative. "If the U.S. dollar gets devalued, gold will go very high," Kumar projects. "With palladium at half the price of gold, it becomes very attractive."

Zakroff agrees. "If interest rates go up, gold prices will go up," he says. He adds that, given the variety of factors that could move gold, he expects the price to be higher rather than lower.

"Flow (of gold) has increased," Zakroff says. Lippincott promotes itself heavily to the home market on the Internet and makes many small purchases—sometimes buying a ring for $12 or a mixed load at $300.

Zakroff calls silver "a dead, boring issue." He adds, "We don’t touch it unless it is a specialty item like collectable flatware." Again, they will not melt the silver, but will offer it for resale.

Silver has not hit $6 since early 1998 (a year when it averaged $5.51). Going back a couple of years to 2000, the monthly average for silver slipped to $4.54 in February 2001, and silver has pretty much spent the rest of the time since then slowly swinging around between $4.30 and $4.50.

Despite the run-ups in gold and platinum, there is little reason to believe silver will visit the $6 or even $5 range soon.

However, that is the curious thing about amusement parks and precious metals. Just when you think it’s safe to sit back, let go, and not worry about anything happening—POP!—something jumps out from a hidden corner, and the market takes a sudden move, leaving participants gasping for breath.

Don’t be surprised if that happens again. As the carnival barkers say: "You pays your money, you takes your chances."