Precious Little Change

Stability (some would call it flatness) predominates in the precious metals markets.

There is not a lot of luster in the precious metals markets today. While the platinum market is optimistic, palladium, gold and silver appear stuck in price and trading ruts. There is good news, however. "Material is moving," says Joan Carr with Sabin Metal Corp., Rochester, N.Y. "We can always use more material," she adds.

"Flow is good. Supplies are increasing," agrees Becky T. Berube, vice president of United Catalyst Corp., Providence, R.I.

United Catalyst focuses almost exclusively on recycling automotive catalytic converters. "There was a bit of a drop-off after September 11," Berube says. "However the networks are in place. I think we’ll see a steady increase of supply of auto catalysts," she adds.

Overall, platinum demand increased in 2001, fueled by a 25 percent increase from the auto industry. Economists at Johnson Matthey Inc., Wayne, Pa., say demand for platinum hit a record 6.15 million ounces last year. Most of the credit goes to increased demand for catalytic converters from automakers.

However, the demand from computer disk makers was off somewhat. Jewelry purchases were mixed: the U.S. and Janpanese markets declined sharply. The Chinese, however, hit new highs for jewelry demand. 

 Supplies of platinum, although up by 11 percent to 5.86 million ounces, fell short of demand by 290,000 ounces. That makes 2001 the third straight year of demand shortfall, despite South African miners turning out an additional 300,000 ounces and the Russians pumping 200,000 ounces into the market.

From January to October, price was off by about a third – slipping from $645 to $406 an ounce in October. Johnson Matthey says it expects growing demand in 2002 to absorb increased mine supplies and predicts a price range of $480 to $580 for platinum in the next six months.

The latest figures from the United States Geological Survey (USGS), Reston, Va., are from 1998 and put recycled platinum in the U.S. at 270,000 ounces. Henry E. Hilliard, silver and platinum group metals commodity specialist, says that U.S. recycling efficiency for old scrap was 76 percent. That is, the old scrap that was refined yielded 76 percent platinum and 24 percent other materials.

Hilliard estimates the recycling rate—the percentage of platinum recovered compared to what was consumed—at 16 percent. He points out that the most of platinum group metals (PGM) recovery still is from automobile catalysts. He notes some increase in chemical processing. "But the factor that controls the amount recycled remains catalysts," he says. He says the trend is upwards, because of the price of the metal.

Growth in specialty glass production, dental alloys and petroleum refining combined to produce a 3 percent increase in industrial demand.

Jewelry manufacturers, however, seem sated with surplus stocks. Jewelry demand for platinum is expected to drop 11 percent because of recycling of surplus stocks and weak demand. The lone exception is China, where fabrication of platinum jewelry continues to expand.

Indeed, while the industry is doing well, recyclers continue to pray for new outlets. Others question the demand.

"From what we see, things will be optimistic," Carr says. "I can’t put my finger on any one factor, but from everything I hear, things are bullish on both platinum and palladium."

Look for global platinum supplies to increase 5 percent to 5.58 million ounces, mainly because of shipments from South Africa. That will not keep pace with demand, leaving the market with a shortage similar to the market shortfall in 2000.

Yet, heavy short selling has depressed prices. For a while, platinum moved in the $400-$500 price range. However, it continues to improve, with springtime prices in the $550 range.

Platinum’s future is unclear, but recyclers are optimistic. While some recyclers and other analysts maintained that platinum would stay in the neighborhood of $500, by April it was trading briskly beyond $550 per ounce and nosed into the $560s. The feeling in the U.S. appears to be that platinum has momentum and will continue to creep upward, if not break near the $600 area in the coming months.

"There always is a slow-down when prices are low," Berube says. "The recycler or dismantler will hold off on processing cars and removing the converters."

In Asia, the feeling is the opposite. Traders are unloading the metal, possibly concerned about rumors that the Russians were about to get back into selling on the spot market. Any such move by the Russians would put a lid on platinum and palladium prices.

But Johnson Matthey sees the automotive sector driving platinum demand and helping to keep prices firm. Meanwhile, the demand for palladium will continue to slip.

"I thought that palladium would start to fall due to Ford’s problems with its trading operation . . . they had to dump a lot of palladium," says Bob Glavin, president of United Recycling Industries, West Chicago, Ill. Ford also said it would no longer need as much platinum and palladium in their catalytic converters.

Yet, he notes, there was no big crash.

United gets most of its palladium from electronics and computer boards, not converters. While Glavin seems pleased that platinum is holding at $550 and palladium is at $370, he is not exuberant. "Palladium is holding its own," he notes, "but I see no reason for anyone to go long on it."

The palladium market is paying the piper for the high prices it enjoyed a year ago. Palladium demand in 2001 was down by a full 25 percent to 6.73 million ounces, according to Johnson Matthey. The high-tech market’s woes were reflected in a drop in production of electronic components, and a drop by two-thirds in palladium demand from the sector.

Auto and dental consumers reduced inventories or moved to platinum. Even though the Russians cut sales in the second half, and palladium supplies declined overall by 6 percent to 7.32 million ounces, supply still exceeded demand by 590,000 ounces.

It doesn’t take an economist to see why the palladium price collapsed from nearly $1,100 in January 2001 to $315 in October.

Market watchers say consumers are likely to further reduce use of palladium in 2002. Look for weak prices, Johnson Matthey says, in the $250-$400 range for 2002.

As recently as mid-February of last year, palladium prices skyrocketed greater than $700. The price for March delivery was at $711 per ounce, fueled by a lack of supply from Russia, the world’s second largest producer, and continued strong demand by the auto industry.

Automakers aren’t dumb, though. Economists say that substitution of palladium in response to last year’s high prices cut demand in all the main consuming sectors. This was exacerbated by the inventory reductions in the auto industry and a severe slump in demand for electronic components. That means the bottom fell out of one of the strongest demand sectors.

Unfortunately, supply figures did not follow suit. Supplies are forecast to hold at 7.53 million ounces. The result, Johnson Matthey predicts, is a surplus of 690,000 ounces.

Current prices reflect this trend. "If these conditions continue, the price is not expected to escape from the range of $260 to $380 over the next six months," Johnson Matthey economists project.

This spring palladium prices have been hovering in the $365 to $385 area.

Berube sees it as part of the typical ebb and flow. "When palladium went to $1,100 per ounce, all the manufacturers were going to platinum.

But when platinum prices go up, everyone is using palladium," she says. For the recycler, such swings take a long time to feel, as the material recovered today was likely used in a product five to eight years ago. As the industry changes, so too do recyclers.

"In 15 or 20 years, if fuel cells become more common, we’ll recycle the PGMs from fuel cells," Berube points out.

There is some irony on the electronics side of the business. Some 10 to 15 years ago many electronics manufacturers were so intimidated by the high prices of gold that they converted to palladium plating. This was in the days of $125 palladium and $400 gold. Now, the worm has turned. Gold is cheaper than palladium and platinum is double the gold price.

However, in many cases it is too late to re-tool. So scrap recovery operations still have a decent supply of palladium and platinum to recover. Since material is flowing, there is a chance to make money at $370.

While this is far from a "worst ever" scenario, it is pretty bad. Back in 1987, the metal started out trading at $120 per ounce. But $360 to $380 palladium still poses difficulties.

Fears of economic and political turmoil since the September 11 attacks on the Pentagon and World Trade Center are reflected in the price of gold. Since the attacks, the price has increased 7 percent to 10 percent, hovering around $300 an ounce.

Unfortunately, that still puts the market price a good 10 percent below the cost of raw-material production, which is in the $325-$330 area. Newmont
Mining Corp., Denver, the nation’s largest and the world’s second largest producer of gold, continues to purchase new operations, including Franco-Nevada and Normandy. However, the company indicates it is going to level off production, especially at spots like its Yanacocha operations in Peru.

United’s Glavin notes that the Middle East is the only real hot spot in the world today. "Any market changes are already factored in," he says. "The fear factor is gone."

Recyclers like Glavin and Carr expect the gold market to hold the status quo. The fraction of gold in scrap material is dropping and has decreased for several years. While she expects the market to hold, Carr is more concerned about the amount of recoverable gold scrap.

In the first half of 2001, gold demand held up despite the global economic slowdown, according to the World Gold Council. Jewelry sales and personal investment in the world’s leading gold consuming countries was 1,600 metric tons, 1 percent higher than a year earlier, according to the regular quarterly survey Gold Demand Trends. First quarter demand was up 6 percent.

Demand in the second quarter was dampened by economic problems in specific countries, falling 3 percent from a year earlier to 764 metric tons. Despite these conditions, the second quarter showed growth in several key consuming countries and regions. These included the Middle East, where demand rose 13 percent in Egypt, 9 percent in Saudi Arabia and 8 percent in the Arabian Gulf, aided by the effect of high oil prices on incomes, by effective promotion campaigns and some deregulation.

Demand in Vietnam and India remained strong, growing by 21 and 7 percent respectively. In the U.S., despite economic slowdown, robust consumer spending coupled with the swing to yellow gold jewelry and a recovery in new coin sales pushed demand to 80 metric tons, 4 percent higher than a year earlier.

The real question with gold is whether the $300 area is a ceiling or a floor price. Bulls hope that the current activity is enough to fix $300 as a floor. Cynics might say the world situation assures that gold bugs will continue to buy gold as a hedge against political upheaval. A year ago, the gold price seemed fixed around $275. Except for a $20 spike in May, which it quickly gave back, gold stayed around $270 until August and September. Even a disaster like September 11 couldn’t send gold over $300 an ounce (it stayed in the $280-290 range into January). It is only in 2002 that gold prices perked up greater than $300.

Look for bouncing between $290 and $310. If gold can break that $310 barrier, it could go to $325-330, which is the cost of production. One has to wonder whether that will encourage the mines to crank up output and pull the rug out from under any potential rally. For that reason, many discount the optimistic predictions that gold will go above $350 before year’s end – unless the political climate deteriorates further.

Silver seems stuck in the $4.50 range. It has not hit $6 since early 1998 (averaging $5.51). In all of 2001 the monthly average beat $4.50 only once – in January when it was $4.57—and it quickly slipped to $4.54 in February and spent the rest of the year bouncing around $4.30 and $4.40. Five-dollar silver is unlikely, and there is little reason to believe it will visit the $6 range any time soon.

The latest figures available from USGS are for 2000. According to USGS’s Hilliard, 1,500 tons of silver were recycled that year.

According to the Silver Institute, average prices for January, February and March 2002 were $4.46, $4.42 and $4.53.

Coin sales, including the American Eagle, Canadian Maple Leaf, Australian Kookaburra, England’s Silver Britannia and Mexico’s Liberdad, are not going to change that at all. China’s Silver Panda might be the wild card. The Chinese say they will issue 21 types of silver coins. They also will have gold and platinum coins.

The Silver Institute says the Chinese could use more than 2 million ounces of silver for coinage – quadruple the 474,000 ounces used in 2001.

Overall, China is forecast to double its 2000 base of 1,200 tons of silver by the year 2015. But 2015 is a long way off.

Carr says she expects the scrap silver market to be "constant." She says they have no difficulty moving material.

Glavin agrees. "We’ll see $4.50 silver forever and a day," he says. "The market is just flat and nothing on the horizon says it will go one way or the other."

Along with palladium and gold, then, silver isn't expected to break out of its trading range soon. That just might be good news for recyclers, most of whom would rather see a steady flow of metal at a predictable price than be faced with a roller-coaster market, uncertain supply and on-again off-again customer demand.

The author is a contributing editor to Recycling Today and can be contacted via e-mail at curt@curtharler.com.