Tipsy Precious Metals Market Brewing

The situation with platinum and palladium in Russia is both absurd and confusing. The failure of the Russians to ship materials for months has thrown metal markets into disarray, although it may do something for their vodka sales. The current situation is enough to make a sober man drink.

Adding to the confusion is a stubborn refusal of the scrap catalytic converter market to rise in tandem with the world price for platinum and palladium.

Meanwhile, prices of gold and silver remained stable. In mid-November, gold was selling at $301 an ounce, silver at $5.05, platinum at $375 and palladium at $150.

In 1997, there was no harmony in the platinum market. For the first time in recent memory, spot prices substantially exceeded the futures prices. In June and July, the spot market for platinum went to $500.

The reason is that Russia simply did not ship materials. In 1996, Russia supplied about 1.1 million ounces to the market. This year, shipments are closer to 500,000 ounces, and there is no other national platinum producer able to step in and make up the difference.

In 1996, demand for platinum increased 40,000 ounces to 4.88 million ounces. Driving demand was growing industrial use, and manufacture of platinum jewelry in the United States and Canada. According to Johnson Matthey, Wayne, Pa., the demand for automobile catalysts and investment products in 1996 actually declined. However, a fall in supplies of platinum from South Africa and Russia brought the market close to balance. But 1997 was a different story.

"It will be very hard for South Africa to make up much of the difference due to strikes and other disruptions," notes Ashok Kumar, venture manager for A-1 Specialized Services, Croyden, Pa. "It will not be easy next year, too," he says. In fact, sources say that it will be the year 2000 before South African mines are able to produce substantially more metal.

Hidden from view is any realistic estimate of metal stockpiles in Russia. Nobody has a tenable handle on the amount of material stockpiled, even if the Russians were shipping in quantity.

Andrew Sabin, president and owner of Sabin Metal Corp., a large platinum and palladium recycler located in East Hampton, N.Y., returned from his 26th trip to Russia in October. "There are no stockpiles in the ground," he says, emphasizing that this is his own opinion. He says the mines are producing a lower grade of ore and the result is less product, and he feels their secondary market is low.

Sabin believes the reason for the lack of deliveries from Russia was not due to an attempt at market manipulation, but rather bureaucratic snafus. "Treasury was fighting with Customs was fighting with Transportation," he says. The situation could continue into 1998, exacerbating the problem. "My basic feel is that they still haven’t solved their bureaucratic problems," he adds.

Demand for palladium, meanwhile, rose by 30,000 ounces in 1996 to 6.15 million ounces. Increased intensity of use in auto catalysts, particularly in the United States and Europe, largely made up for a fall in demand from the electronics sector, which over-stocked palladium in 1995.

Supplies rose by 480,000 ounces to 6.82 million ounces due to record sales of palladium from Russia and South Africa. A price support level between $130 and $160 had been established a year ago by this rising trend of demand. The big question mark was the continuation of Russian shipments ... and the market soon got an answer. Gulp some more vodka – the metal isn’t coming.

While markets in North America and Japan screamed for supply, the Russian Bear slept. The Russians reported ongoing negotiations with their Norilsk Mines, which is the largest nickel producer in the world and also has significant deposits of platinum group metals (PGMs). According to Norilsk data, their mines alone account for 40.2 percent of world PGM reserves, and they have been producing the material since 1943. Although Norilsk is fairly forthcoming regarding its nickel production, the mine is very secretive about its PGM production, says one market analyst.

"They never made any substantial shipments in the first three or four months of 1997," Kumar says. "This was a big surprise. They kept saying, ‘Next month,’ but the material never moved."

It’s not clear why the mine shipped so little platinum and palladium in 1997, but Norilsk has had its share of problems, from cash flow problems to a problem paying for its natural gas to ownership disputes.

"In my opinion, the palladium does not exist," says Sabin. There are some reports, however, that the Russians started shipping a bit more platinum and palladium toward the end of 1997.

Noting that 60 percent of the world’s supply comes from Russia, that stockpiles have been used up over many years, and that lower quality ore is being mined, Sabin concludes that there will be continued upward pressure on prices. "The Russians would be crazy to let prices go back to $120 when the market is showing it will handle $200," he says.

At the same time, the automotive industry has continued to increase its demand for palladium in catalytic converters. In fact, it appears that the auto business has come to depend on palladium. In Japan, the electronics manufacturers continued their high demand. World markets were looking for something in the area of 6.5 million ounces, with the possibility of hitting seven million ounces. World supply was four million ounces.

What metal was coming onto the market was coming from stockpiles. However, those stockpiles are not bottomless. Where palladium shipments from Russia totaled 3.4 million ounces back in 1994, as world demand grew, shipments went up to 4.2 million ounces in 1995, then 5.1 million ounces in 1996. This year, the shipments are around 3.5 million ounces at best – back to 1994 levels.

Even given output from South Africa, and a sizable recovery of recycled materials, the 1997 shortfall of materials is likely to be between 700,000 and 1 million ounces.

Sabin says the current shortfall is not a repeat of the rhodium situation, where production was the problem. "You can’t make the metal out of thin air," he says. Meantime, he adds, Eastern Europe is moving toward better pollution controls on autos and it is likely demand for converters will increase there, following the Western world.

Predictably, prices zoomed to highs near the $240 per ounce level, 50 percent higher than year-ago levels. In fact, Sabin says he believes the palladium price will go up more, hitting $300 in 1998, up from $200 through much of 1997. Coupled with platinum’s $500 an ounce spot price, recyclers with catalytic converters and electronic components were riding a boom, right? After all, converter stockpiles are thin, as well.

Break out the vodka again … there is no big price increase for catalytic converters. They still are in the $4 to $18 area.

While admitting that it would appear converter prices should go up in tandem with the market, Kumar points out that – short-term – the higher prices will be of little help to scrap dealers. Converter processors buy scrap and hedge it against futures prices. The upside-down market means that prices four months out may be as much as $50 below spot prices. Since it takes four to six months to process a converter, the processors are still paying the future price (when they can sell the metal) as opposed to the spot price. "Unless you have the metal in hand, you won’t get spot price for it," Kumar says.

The good news, however, is that continuing demand for both platinum and palladium is likely to be strong. On the East Coast, the supply of converters was a bit slow going into the late fall. The late summer was largely responsible, although industry observers do not expect a serious shortfall. "If it stays warm with El Nino, there will be less wear and tear on cars, so there could be less supply coming from a lot of states out west," Kumar says.

Putting a damper on markets in November were the dives taken by the Hong Kong and other world stock markets. Fear that manufacturers would trim demand put downward pressure on prices. But the overall driver likely will be the shortfall of supply in the face of strong demand. Dental markets use palladium and are rather inelastic with response to price. There is no good current substitute for palladium in mobile or cellular phones. While other electronics may be able to substitute materials like nickel for palladium, that is not an option in cellular phones.

"With 60 percent of the world market using catalysts, there is little chance of the palladium market going back to $150 soon," Kumar says.

Sabin says the market should beware the likelihood of substitutions. Gold might be a substitute for platinum or palladium, especially in the electronics area. "There is so much gold around that we can’t use it all," he says. Since gold can be used in electronic applications at smaller thicknesses, there may be a move back to gold for some uses, he says.

There is good demand for gold and primary producers are looking for more sources. Still, prices remain humdrum. For the third straight year, worldwide exploration expenditures of U.S. gold producers increased – up 15 percent in 1996 – according to The Gold Institute, Washington. This follows a 14 percent increase in 1995, bringing the combined total for 1995 and 1996 to more than $1.17 billion. The United States currently is the second largest gold producer in the world, behind South Africa and ahead of Australia, Canada, China and Russia. In 1996, production of gold in U.S. mines totaled nearly 11 million ounces, 11 times what it was in 1980.

According to John Lutley, president of The Gold Institute, there has been a 27 percent decline in old gold scrap during the first half of 1997. In addition, he notes that supplies of scrap have all but disappeared, Japan being the exception. "Normally, lower price leads to less recycling because borderline materials are not being processed," he continues. Material which was marginal to handle at $350 an ounce may not be worth bothering about at a price of $310.

The production trend is to underground mines. "By the year 2000, one-third of U.S. production will be underground," he says. "To be profitable, the ore grade has to be considerably higher since underground ores are more expensive to process as well as more costly to mine."

That does not change the weak price today, doubly surprising in light of world stock market declines. "The gold situation is fragile at the moment, due to Central Bank sales," Lutley adds. This is despite strong fundamentals: mine production is up just 1.4 percent, old gold scrap is down 27 percent and world demand is up 15 percent.

Even the rumor that the Swiss were thinking about selling gold was enough to put a lid on the market price. The day-to-day price is controlled by speculators, and they are apt to ignore supply and demand as long as the central banks continue to be sellers.

In contrast to gold, the silver markets showed good strength as demand, especially from India, continued strong and the world buyers chipped away at the existing stocks. The story on silver in 1997 is mainly India’s silver bullion imports, which surged over 100 million ounces in the first eight months of 1997, a 50 percent increase over the corresponding period of 1996, according to data provided to The Silver Institute, Washington, by Gold Fields Mineral Services Ltd. (GFMS), London.

India is the third largest fabricator of silver in the world and imports nearly all of its raw material needs. Last year, total Indian silver imports reached a record 105 million ounces, or 16 percent of total world demand for new silver. This year, it is anticipated that imports could greatly exceed that level, having surpassed 95 percent of 1996 levels in just eight months.

"The strength in worldwide silver offtake this year has been a key factor in the decline in above-ground stocks, and reflects the continuation of an eight-year gap between fabrication demand and supply from new mine production and scrap recycling," according to GFMS. Comex silver stocks have fallen by 66 million ounces, more than five times the 13.3 million-ounce stock reduction in 1996.

"Fabrication demand has been maintained in North America, Japan and Europe, and with the strong rise in Indian demand, we expect global demand to exceed the record level set in 1996," says Paul Bateman, executive director of The Silver Institute.

"We do expect some rise in mine supply, but expect that for the ninth straight year, demand in 1997 will significantly outpace conventional supply – a gap that has widened substantially over the past eight years," Bateman adds.

In all, it unlikely that recyclers will be raising a toast to their precious metals prospects in the near future. Instead, they will be reeling from the drunken gyrations in the market and trying to stay on top of a fluctuating situation.