The rise of platinum and palladium prices is not fully reflected in the equity values of producers.
Long-Term Luster
By John Brimelow
Gold glittered for a while last year, but platinum and palladium kept shining throughout 1999 and are doing even better in 2000. Despite this, the shares of publicly quoted companies that produce the white metals have been weak this year. This presents a buying opportunity.
Palladium has risen by 25% this year, to $562 an ounce, four times its price in the mid-1990s. Platinum is up 13% this year, to $503 an ounce (23% higher than its average in 1994-1995). The reason for the buoyancy is surging demand and inelastic supply.
Palladium is a key ingredient in the catalytic converters that control harmful car emissions. As environmental regulations tighten, automakers need more palladium. Platinum is sought after for jewelry, not least in China, where consumption soared by 53% last year, to 950,000 ounces, a fifth of global supply, reports Johnson Matthey, a precious metals manufacturer in London.
Russia is a frightening supplier. It supplies about two thirds of the world's palladium needs, and half of the Russian supply comes from stocks. In the first six months of each of the past five years, it intermittently cut off supplies, scaring consumers. Last summer it applied the same tactic to platinum; though it controls only 11% of world supplies, it still managed to push up the price.
With palladium and platinum prices up, so are Russian export revenues. Now the palladium industry is wondering what will happen when (not if) Russian stockpiles finally run out. Valery Rudakov, the head of the agency that stocks the metal, said in March that there were 6.5 million to 10 million ounces of palladium left, two to three years' global consumption. It's pretty clear that Russia is determined to push up prices before its stocks are indeed exhausted.
Russia's tactics caused the destruction of the only effective palladium futures market, at the Tokyo Commodities Exchange. The Japanese authorities intervened in late February to rescue Japanese short-position holders from largely foreign longs. By doing so, they killed investors' trust in the only significant market for transferring price risk for palladium. Now Russia's moves will be fully felt on the spot market, increasing volatility and heightening the need to carry inventory.
Russian producers aren't the only ones that will benefit. But share prices of the South African mining companies Anglo American Platinum and Impala have actually fallen this year, 13% and 17%,respectively, after rising 114% and 185% in 1999. The prices have fallen because investors focused on possible Russia-induced short-term price drops, failing to evaluate the long-term shift in fundamentals that is likely to push prices higher.
John Hathaway of the Tocqueville Gold Fund in New York holds both stocks and estimates that they are priced at 8 and 6 times earnings (year through June) and recommends them. He also thinks highly of Stillwater (American Stock Exchange: SWC), which mines palladium and other platinum-group metals from huge reserves in Montana. But Stillwater has infuriated Wall Street with a series of operating problems. The stock has fallen 40%,to $28.50, from its high in March and is trading at 14 times 2000 earnings.
John Brimelow is director of international equities at Donald & Co. in New York.
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Chart:
Platinum And Palladium Glister, Too
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By John Brimelow
The Investment Guide
From June 12, 2000 Issue |
