The stellar returns found in the commodities markets in recent years have attracted the attention of large speculative investors who have helped propel the value of these assets to new highs, arguably in excess of the underlying value implied by fundamental supply/demand data.
Throughout the past few years, speculative investment funds have increased their exposure to the commodities markets as a means of capturing returns that have exceeded those offered by many fixed income or equity counters. Investment and speculative fund holdings of exchange-traded precious metals, as measured by the Commodity Futures Trading Commission, have grown significantly. Since January of 2005, total open interest on New York Mercantile Exchange of net long non-commercial and non-reportable positions increased by 20 percent for palladium and by 140 percent for platinum.
We could expect fund interest in precious metals to continue as long as the fundamental analysis stays positive and returns remain high relative to other investment opportunities. Moreover, some level of exposure to the commodities markets may continue regardless, as many investment funds now include metals as a suitable asset class for diversification. However, the potential for a sizable correction with these large speculative holdings is a concern given the magnitude of prospective long liquidation.
DOLLARS AND CENTS. Another factor that could have a potential impact on platinum group metals (PGM) prices in the near-term is the recent appreciation in the value of the South African rand against the U.S. dollar, up some 12 percent in the last six-month period. Earlier last year, South Africa’s largest platinum mining company, Anglo American Platinum, lowered its target output of platinum for the next two year period by more than 20 percent because of the strength of the rand and its influence on capital expenditure programs. The stronger rand results in lower revenues in local currency terms and less incentive for mining companies to expand current capacity levels, leading to more conservative growth estimates of new mine supply.
Moreover, many of the developing mines are located on the Eastern limb of South Africa’s PGM producing Bushveld geological complex and along Zimbabwe’s Great Dyke, where mineralization of the primary ore-bearing reefs yields a higher ratio of palladium to platinum than ore derived from present mining operations. The combination of an expected growth in the proportion of lower-priced palladium supply and the continued strength of the rand vis-à-vis the dollar could negatively impact the future producer basket price for PGMs.
In contrast, the U.S. dollar will continue to be affected by the weight of record-level twin deficits and the likely end to a series of short-term interest rate increases.
Historically, a weakening U.S. dollar has been supportive of rising metal prices, as dollar-based commodities become more reasonably priced in other currencies. The recent decline in the dollar’s value against the euro should make PGMs relatively more affordable to European converter and jewelry manufacturers.
The Japanese yen is expected to remain weak against the U.S. dollar for at least the near-term, as the Bank of Japan continues to supply liquidity to the market in its decade-long battle with deflation. A weak yen equates to higher platinum prices in yen terms and more often leads to increased buying interest from local investors.
AUTOMOTIVE TUNE-UP. More restrictive environmental legislation limiting automotive emissions being enacted worldwide will likely result in increased requirements of PGMs for this application. Coupled with this heightened demand for pollution control will be the anticipated growth in auto production, with current annual sales levels projected to nearly double during the next 15 years. More importantly, the proportion of diesel-powered cars sold in Europe continues to rise, now accounting for nearly 50 percent of that market. In the United States, diesel-powered cars currently account for only 3 percent of the sales market. By 2012, however, diesels are projected to more than double their current U.S. market share, and by the year 2015, could account for 12 percent to 15 percent of U.S. car sales.
As a consequence, the auto sector’s current platimum production requirements could see sustainable growth of 8 percent to 10 percent per annum for the foreseeable future.
Given these strong market fundamentals for platinum and the continued investment interest from institutional holders, the metal could again achieve new all-time highs in pricing, perhaps challenging the $1,100 mark in the first quarter of 2006 in what could likely be periods of volatile trading activity. Any additional fund interest or further expansion in metal prices overall could support a move to possibly $1,150 to $1,200 an ounce.
A projected 6 percent increase in world supplies of platinum in 2006, principally from an estimated 300,000- to 400,000-ounce rise in mine production in South Africa and an additional 75,000 ounces of recycled metal, could limit further upside moves. Also, any unanticipated increase in producer selling or large-scale disinvestment by speculative investors could force a market correction, and depending on the size of the fund liquidation, possibly down to the $880 to $920 range.
Similarly, the palladium price now appears poised to surpass the recent high of slightly more than $300 an ounce as commercial demand continues to improve. The price may be expected to rise further, perhaps up to last year’s level of $335 an ounce. Escalating platinum prices could encourage further substitution of palladium in jewelry applications and in automotive converters, both for gasoline and diesel engines. In the event of large fund sales, palladium could fall, finding support above the $220 level.
For the longer-term, the continued need for rhodium from auto manufacturers to meet the upcoming expansion in environmental standards for trucks and plans for the anticipated increase in production of diesel-powered engines in the United States and Europe should further support the metal’s price.
In addition to the environmental issues, growing commercial demand for rhodium for expanding fiberglass and LCD manufacturing, particularly in the Far East, should bolster demand for rhodium. The rhodium price has now crossed above the $3,100-$3,200 level, an area that had presented some resistance in recent months. Some shortcovering of forward sales transactions may have also occurred in recent weeks, exacerbating already tight market conditions. Continued increases in commercial requirements, specifically for autocat manufacture, and the absence of any increased Russian selling should support additional gains.
The growth in consumption of both platinum and palladium in recent years has largely been a consequence of the burgeoning demand from the automotive sector, resulting from rising vehicle sales worldwide and increasingly more stringent emission control standards.
Demand for platinum in the automotive sector has risen dramatically in recent years, reporting an estimated 14 percent compound growth rate over the past five-year period, far outstripping an approximate 4 percent expansion in new mine supplies. Arguably, some of the gains in platinum consumption during this period came at the expense of declining demand for palladium, which suffered following the run-up to prohibitively high prices in 2001. Nevertheless, autocat manufacturing requirements now account for more than 50 percent of new platinum and palladium supplies annually and some 90 percent of available rhodium, as the PGM market has become increasingly defined by the demand profile of automotive catalyst consumption. The significant price discrepancy between platinum and palladium has prompted an increased usage of lower-cost palladium in the manufacture of autocats, particularly in the U.S. market.
A recent study by a European research group posited that owing to the anticipated explosive growth in demand in developing nations, worldwide auto sales could reach 100 million units annually by the year 2020, with more than 1.5 billion registered autos. The U.S. Department of Transportation has projected that the number of global registrations could swell to more than 3.5 billion by 2050.
SECONDARY SUPPLIES. The continued rise in the availability of retired or scrapped autos, greater efficiencies in the recycling process, benefiting from improved PGM and scrap prices and more restrictive and proactive regulations abroad will likely lead to higher amounts of reclaimed metal in coming years. The recycling industry is maturing as it becomes increasingly more global in its reach. The supply of salvage autocats is not only sourced from the United States, Europe and Japan, but also now flows from Eastern Europe, Australia, New Zealand and a growing number of countries in Asia and Latin America.
On a worldwide perspective, it has been estimated that as many as 780 million cars and trucks remain in operation. The current rate of recycling of more than 27 million vehicles per annum accounts for only about one-half of new car sales, owing to the remaining inefficiencies of the recycling process and a greater demand for used vehicles and cars overall, particularly in developing countries. Governmental regulations and recycling programs to improve recycling rates are currently being established. In the United States, for example, the Department of Energy has outlined a strategy that would enable the U.S. recycling industry to achieve a 95 percent reclamation rate for an end-of-life vehicle (ELV) by the year 2020.
The European Union has chosen a different tact in enacting legislative measures to control the recycling process. The EU’s Directive on End-of-Life Vehicles mandates that the last owner can deliver the ELV to an authorized treatment facility without cost, and be issued a Certificate of Destruction verifying the proper disposal of the vehicle. By 2007, the responsibility of recycling and the cost of treatment will have to be assumed by the vehicle manufacturer. The directive specifically requires the removal of the autocatalyst during the treatment process. The goal set by the EU calls for 85 percent of the vehicle’s value to be recycled by 2006, up from prior levels of 55 percent to 65 percent. A secondary target for a more ambitious recycling level of 95 percent of a vehicle’s value has been set for 2015. Similarly in Japan, the Automotive Recycling Law which was enforced as of January 2005, requires the licensing of recycling businesses and the collection of fees from the owner of the vehicle to compensate for eventual disposal costs. The objective of the new law is to raise the recycling rate in Japan to 95 percent by the year 2015.
For calendar 2006, A-1 estimates that recycling amounts from spent autocats will rise further, with platinum increasing to 890,000 ounces, from an approximate 815,000 ounces in 2005. Recycled palladium will surpass that of platinum for the first time, rising to 950,000 ounces this year, up from 740,000 ounces in 2005, while rhodium could move to 175,000 ounces from 160,000 ounces.
At the present time, PGMs derived from recycled material account for only a small portion of total available supply, estimated at 12 percent for palladium in 2006, 12 percent for platinum and 18 percent for rhodium. By 2010, however, contributions from recycling could rise significantly. Platinum supplies from recycling, which could total nearly 1.1 million ounces by 2010, will represent the largest source of metal outside of South Africa, while the amount of reclaimed palladium, estimated at 1.9 million ounces in four years, will surpass total new mine production from North America.
The author is a director of A-1 Specialized Services & Supplies Inc., Croydon, Pa., a recycling firm specializing in catalytic converters.
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