Prices Perking

The pendulum swings in the precious metals market are expected to get narrower, according to sources. Stability will come from anticipated higher demand from the automotive and manufacturing sectors. Other calming factors include the international scene, though if the situation in Korea, the Middle East or another hot spot flares up, any stabilization will not last.

This means the market for recovering PGMs (platinum group metals) from auto catalysts should be vibrant.

SIGNS OF GROWTH

“The supply of automotive scrap is projected to continue to show steady growth, particularly in the U.S., as higher metal prices encourage a greater pace of collection of salvage material,” says Ashok Kumar, director, A-1 Specialized Services, Croydon, Pa. In contrast, Kumar notes the supply of salvage autocats from the EU countries may actually have fallen by 10 to 15 percent by the second half of 2010 on declining sales of new cars. In addition, the various auto trade-in programs across Europe, which bolstered collection totals through most of the prior year, were phased out.

“Supply is much better,” agrees Steve Shalit, vice president of Catalytic Converter Corp., Jamaica, N.Y. With the recent jump in prices of all the PGMs, sellers seem ready to do business.

For Shalit, the last two months of 2010 were a welcome relief from the late summer months, when supply of autocats was miserable. “Business has been up over the past couple of months,” he says. “Since the metals markets popped, the big guys started to sell.”

The overall demand for platinum could be up 6 percent, according to Johnson Matthey analysts. They peg demand at 5.72 million ounces—a surplus of about 290,000 ounces.

While North American production is small in the overall scheme of things, Johnson Matthey analysts say they expect a drop in mined supply by 19 percent to 210,000 ounces. The analysts also forecast a slight drop in the huge South African production in light of a series of safety stoppages and supply interruptions. A 1 percent fall would bring production to 4.59 million ounces. Some of that will be offset by an anticipated 810,000-ounce jump in Russian supplies. Zimbabwe, likewise, will boost production and is expected to produce about 280,000 ounces, according to Johnson Matthey.

IN RECOVERY

Platinum recycling is strong. Johnson Matthey analysts forecast the combined catalyst, jewelry and electrical sectors to jump 31 percent to 1.84 million ounces of platinum.

The total amount of platinum recycled from spent autocats should improve further in 2011, Kumar says, adding that he expects it to nudge to more than 1 million ounces. That is a similar 20 percent gain from 2010 estimates of 820,000 ounces.

Rhodium supplies from recycling are expected to expand by 15 percent in 2011 to 225,000 ounces from 195,000 ounces in 2010.

More stringent emissions standards mandated by implementation of U.S. Tier 2 and Euro 5 regulations require a greater presence of PGMs to reduce harmful emission levels in engine exhausts. The Euro 5 standards introduced in 2008 call for 80 percent reduction in particulates and 20 percent decrease in nitrogen oxides for diesel engines and a 25 percent cut in nitrogen oxides and hydrocarbons for gas engines.

Johnson Matthey forecasts global demand for platinum in autocatalysts in 2010 to settle out at almost 3 million ounces in 2010, up by 37 percent. The European market will lead the charge, up 46 percent to 1.42 million ounces. Johnson Matthey bases its prediction on an expected move to fleet vehicle buyers favoring diesels.

Meantime, those analysts forecast recovery of platinum from spent catalysts to jump by almost one-third to 1.1 million ounces.

“I think people are getting a bit more confident,” Shalit says. “It’s not like 2008 and 2009.” He says he sees car sales perking up all along the spectrum from Hyundai to Mercedes. “The whole business is doing better,” he says.

Look for a tiny surplus—perhaps 45,000 ounces—in the palladium market, according to Johnson Matthey analysts.

They forecast 2010 demand to increase 15 percent to 8.94 million ounces. Again, this growth is predicated on stronger industrial demand and a livelier automotive market.

Recycled palladium will contribute 1.85 million ounces to the overall supply of 7.14 million ounces. Part of this will be because of a 29 percent jump in the recovery of catalysts and part of the supply will be from electronics and jewelry recovery, according to Johnson Matthey analysts.

Demand figures are expected to indicate that 2010 finished up 27 percent, fueled in large part by the recovery of light-duty vehicle production. China is the leader here, as the country produces more gasoline vehicles.

Consumer electronics demand will be up 8 percent to almost 2.5 million ounces. That puts demand close to 2008 levels, according to sources.

Recycling of palladium from scrapped electrical devices is expected to be up 11 percent. Legislation mandating recovery of end-of-life electronics will fuel the volume of electronics brought to recyclers.

Palladium has risen to its highest level in nine years, since the metal spiked to more than $1,100 per ounce on an unexpected temporary halt to supply shipments from Norilsk, Kumar says. The market’s assessment of a potential loss of what has been estimated to be as high as 1 million ounces of palladium stocks each year from the Russian central bank may have now resulted in a similar supply shock to the marketplace as that recorded in 2000 and 2001.

“Based on the market’s assessment of a potential deficit in palladium supplies, firming global auto sales and significant fund buying, palladium prices may be expected to rise further in 2011, possibly testing $850 an ounce,” Kumar says, noting that similar fundamentals for platinum with increased fund participation could bolster platinum prices back over recent November highs of $1,810 an ounce, rising to $1,850 to $1,900 per ounce in early 2011.

Supportive fundamentals have made palladium the favored metal among speculative investors over the past two years. It is the most commonly used PGM in autocat manufacturing worldwide. The exception is the EU, where diesels account for about half of all new car sales. Continued strong vehicle sales in China, improving U.S. car numbers and increasing usage in diesel converters in Europe buoy commercial demand for the metal, Kumar says.

Still, Kumar questions whether the market’s expectation for increasing worldwide car sales justifies the move up to $776 per ounce in December, its highest level in nine years.

He says, “On commercial demand alone, it could easily be argued that palladium is overvalued at the present time, vulnerable to periods of sharp corrections as experienced in early November.”

Speculative demand, however, is still credited with the sharp gains for the metal throughout the past year, as fund investors tend to oversubscribe to the same attractive opportunities.

Investor holdings of platinum and palladium increased significantly by November, supporting metal prices to their 2010 highs. Total ETF (exchange traded funds) holdings of platinum rose to just more than 1 million ounces, gaining 366,554 ounces from the start of the year, with CME/NYMEX non-commercial and non-reportable positions adding another 1.63 million ounces. For palladium, ETFs held 1.9 million ounces on behalf of investors, up 734,699 in 2010, with an additional 1.96 million ounces accumulated on the CME.

DOWN THE ROAD

Shalit says he feels the PGM group is headed higher through the first quarter of 2011. That brings up the interesting question of whether to sell now or to hold. If predictions for further price growth are correct, why not hold?

“If you have deep pockets and you can hold on, then hold on to it,” Shalit advises.

Still, many yards wanted to get inventory off the books at year’s end. Others simply lacked the space to store autocats and some were scratching for cash flow.

Kumar says he sees platinum supplies from the South African mines edging higher in 2011, with production gains seen at Zimplats and other smaller mines, such as Mimosa, Two Rivers, Anooraq and Platmin. A recovery in the operations at Impala and the resumption of full mining at Everest mine at Aquarius in 2011 should result in further increases of possibly 200,000 to 300,000 ounces in South African platinum production in 2011, potentially topping 5.5 million ounces of platinum.

Demand for palladium in 2010 finished down nearly 20 percent at 630,000 ounces, Johnson Matthey says. A drop in interest in jewelry from China is the main cause. Likewise, sales of platinum-based jewelry softened to 2.42 million ounces in 2010, off by 14 percent.

However, those high prices for platinum and palladium jewelry bode well for recyclers, as 30 percent more platinum jewelry is expected to flow through recycling operations.

Another factor in palladium’s stellar performance since mid-2010 is the market’s perception that the significant stocks held by the Russian central bank may be all but depleted. Kumar cites recent comments from management at Norilsk that Russian bank stocks have been on the decline in recent years and that, while no official announcement has or likely will be made, it has been posited that there may be no sales offered to the markets in 2011. More than 1 million ounces of palladium from state bank stocks annually are believed to have been sold onto the market in recent years. “The cessation of these stock sales would likely put the palladium market in deficit in 2011 for the first time in many years,” he says.

Meanwhile, Russia’s central bank has purportedly been buying gold for its reserve holdings as a means of diversifying out of U.S. dollar positions. But, like gold, palladium has proven to be an alternative investment to the dollar, rising substantially in value in reaction to the steady decline in the U.S. currency.

“As both gold and palladium are negatively correlated to the movements in the dollar, it may seem questionable why Russia would sell one metal and buy the other,” Kumar says.

Palladium stocks held by the Russian bank are considered to be a government secret and will likely never be divulged. And if palladium sales from the Russian central bank do begin to taper off, it may not necessarily dispel the reality that sizable stocks are still being maintained.

As the economy improves, so should industrial demand for platinum. Johnson Matthey forecasts gross industrial demand at 1.72 million ounces. Leading the recovery will be the demand for LCD TVs and computer monitors. About a thousand ounces of platinum go into TVs and monitors every day of the year, bringing the total demand to 365,000 ounces.

Expect platinum to trade around $1,750 per ounce in early 2011, with a range of $1,550 to $1,900.

Kumar says an anticipated increase in primary supplies of more than half a million ounces of palladium in 2011 should partially offset the possible loss of Russian central bank sales going forward.

Production at Norilsk improved last year in tandem with the rise in metal prices and will likely exceed 3 million ounces of palladium in calendar 2011, up by some 200,000 ounces from 2009 totals. PGM production at Vale Ltd. was minimal in 2010, as mining of the company’s Sudbury, Ontario, operations only recommenced in September 2009 following a protracted labor strike that lasted nearly a year. The first production of PGM concentrates at Vale will likely be available for sale in the first quarter of 2011, Kumar says. Vale produced 411,000 ounces of PGMs as byproduct material in fiscal 2008, including 238,000 ounces of palladium and 173,000 ounces of platinum, in its last year of full production.

North American Palladium likely produced around 90,000 ounces of palladium in 2010, with operations at the Lac des Iles mine restarting in the summer after being mothballed in October 2008 in light of falling prices. The company targeted annual output of 140,000 ounces during the next two years.

Johnson Matthey looks for palladium prices to be supported by fundamentals and investment. The caveat, however, is that the prediction is based on increased industrial and automotive demand. This presumes the global economic recovery will continue apace.

National debt and resultant austerity measures could slow growth. China, as always, remains an enigma. If the Chinese economy slows, or a mandate comes from the central government, all bets are off. Russia, too, is a wild card. If no shipments are made of the Russian state stocks of palladium in 2011, the palladium market will be in substantial deficit, Johnson Matthey analysts warn.

If there are no surprises, look for palladium to trade around $710 per ounce in early 2011, perhaps bumping $850 on the high side but unlikely to go below $550 per ounce.

The author is a freelance writer based in Cleveland. He can be contacted at curt@curtharler.com.