Platinum and Palladium Prices Soar
as Supply Shortages Persist
Webcast transcript from May 16, 2000
Jacques Luben: Good evening ladies and gentlemen. My name is Jacques Luben . I
will be your moderator tonight for the May 16th broadcast of
LiveInvestorsForum.com. Our topic of discussion is "platinum and palladium prices
soar as supply shortages persist."
Platinum and palladium are normally overshadowed by gold and silver which are
more popular and well-known. From an investment point-of-view, however, both
gold and silver have basically traded sideways to lower over the last few years:
much of the interest in precious metals has shifted towards platinum and palladium
because the price performance for these two metals has been much more
compelling.
To put it in perspective, at the beginning of 1997 the price of palladium was at
$123 an ounce and just recently it traded over $700 an ounce. In the case of
platinum, we saw the price of platinum increase by 22% during the course of 1999
and this year, during the first quarter it peaked at $542 an ounce, which was an
additional 20% gain over last year's closing price.
We have three extremely knowledgeable, distinguished guests this evening who are
going to talk about something that they follow on a daily basis. These experts are
widely quoted in the financial press around the world. Our first guest is Mr. Jeffrey
Christian who is the Managing Director of the CPM Group, a leading commodity
research and consulting company in New York City. Mr. Christian advises mining
companies, trade associations and many others. He is on the "short list" of people
who are normally quoted in The Wall Street Journal, Barrons and other major
publications when there is any sort of discussion about the precious metals
markets.
Our second guest is Ms. Kimberly Day. Ms. Day is the Executive Director of Platinum
Guild International, PGI. PGI is an international trade association, funded by the
larger producers and fabricators of platinum group metals that are primarily located
in South Africa. Ms. Day's main responsibilities are that she cooperates with
governments and private mints to develop investment products that appeal to "hard
money" investors.
Our third guest is Ms. Rhona O'Connell who is in London. She is a Senior VP of a
company by the name of Canaccord Capital. Ms. O'Connell is highly regarded in the
marketplace and is the leading authority within her company about precious metals.
She publishes widely and is particularly well known for following the gold and
platinum markets.
As I said earlier, platinum and palladium have been doing extremely well. They
have, to some extent, detached themselves from the performance of gold and
silver. I will start with Rhona O'Connell and ask her about the major reasons she
thinks that platinum and palladium have done as well as they have over the last
three to four years?
Rhona O'Connell: I think primarily it is the function of the imbalance between
regularly available supply and the underlying demand in the markets. Unlike gold
and silver, which to some extent are mature markets in terms of demand
components, both platinum and palladium are enjoying healthy growth, indeed
robust growth, in a lot of their own uses.
Obviously, the environmental legislation over the last ten to 15 years has been a
huge boost for them because they are the only metals that are so far capable of
giving up the emissions from automotive exhaust. That has been incredibly
important. The electronics growth worldwide has also been very significant.
Platinum, in particular, benefits from the very good work of the Platinum Guild.
Platinum has been growing enormously in terms of jewelry off-take. The latest
spotlight has fallen upon China where the young people have taken to it with a
vengeance, tending to regard gold as something which belongs more to the
middle-age sector. The off-take in that country, although it may now be starting to
mature, has actually rocketed from nothing five years ago more or less to one in
excess of half million ounces annually.
All of that has led, along with growing supply, but it has led with its feet to the
extent that demand growth has out-stripped the supplies and obviously, we have
had to look to deplete inventories in order to keep the markets in balance. There
hasn't always been a balance and the prices have responded accordingly.
J. Luben: Jeff, would you say that the platinum and palladium markets are a lot
smaller than the gold market?
J. Christian: Without a doubt. If you look at the total value of the precious metals
market, gold accounts for something on the order of 85% of the market. Platinum
and palladium are very small in terms of the dollar value of metal turning around.
That is one of the factors that has led to some of the price volatility that you see in
these markets.
J. Luben: During the last year that you have been following the market, have you
been surprised by the strength of the rally in palladium in particular?
J. Christian: You have to be surprised in the strength and the extent of it. We have
gone on record several years ago as saying that we thought the price of palladium
was going to have to move up sharply. We had said that we thought the price could
get to $400 or $500 on an annual average basis.
A lot of people in the market looked askance at the time because the price was
about $150 to $200 an ounce, which at the time was near record levels. History has
proven that we were right in the direction and wrong in the degree in that the price
has gone up as high as $840 earlier this year. I guess last year the average price
was about $359. This year the price may average closer to $600 an ounce.
We have been surprised at the magnitude of the increase, although looking at the
market two or three years ago and looking at what was going on with fabrication
demand in auto catalysts, chemical catalysts, electronics, as well as on the supply
sector, especially with Russian exports, you could see that something was going to
have to happen and that the palladium price was going to have to adjust upward
sharply.
J. Luben: Right now, palladium has obviously gone up a lot more sharply than
platinum. Is it your sense that, going forward, the rate of increase of palladium will
continue to outpace platinum? Are you bullish about either of the metals or both of
the metals?
J. Christian: The rate of increase in terms of price or demand?
J. Luben: I guess both. To some extent they are interrelated.
J. Christian: Looking at demand first. Palladium demand is suffering now from the
fact that the price has risen so sharply. In many applications palladium is relatively
indispensable but you are seeing per unit reductions in some uses. In other uses,
for example, in dental and medical applications, you are probably seeing a 40%
decline this year over last year in the use of palladium simply because you can
substitute out of palladium into gold.
So in terms of demand, I think that demand growth prospects for platinum are
probably better than palladium right now. One of the reasons is because of reverse
substitution into platinum from palladium.
In terms of prices, the price of palladium has already risen past what our long-term
objective was. We would almost think that you were going to see some sort of
cutback, although our projection rate now is that it is more likely to move into a
plateau than an actual reduction.
Platinum has not exceeded our long-term objectives but it has reached our
long-term objectives sooner than we thought it would. Again, I am not necessarily
convinced that you are going to see the price fall but it may be that you are going
to move more slowly in terms of rate of increase going forward and maybe more
like a plateau.
J. Luben: Rhona, do you share Jeff's views about the potential substitutions for
platinum and palladium?
R. O'Connell: I do actually, particularly on palladium. It is not just a question of
price elasticity because the Russian component and supply is so large in a normal
year (if there is such a thing when you think about Russian supplies), palladium
supplies from Russia are in excess of 60% of the metal that is supplied into the
western world, particularly Asia. They have a very close relationship with the
Japanese.
One of the elements that the Japanese consumers, most notably in the electronic
sector, has been the fact that palladium supplies have been sporadic. The have
been sporadic with platinum too. In fact, last year was much worse for platinum out
of Russia than palladium was. But because so much of the western world supply
comes from Russia, a lot of consumers can just about deal with volatility but they
don't like unreliable supplies. That is one of the reasons why we have been looking
elsewhere, as well as the price sector.
J. Luben: So what you are saying is that larger industrial consumers are more
confident that they will get the platinum they need and are willing to continue to
use platinum but they are much more skittish about their ability to get their hands
on enough palladium to operate.
R. O'Connell: Pretty much. A number of the world's largest manufacturers of
multi-layer capacitators went on record in late '98 as saying that they were moving
away from palladium in favor of base metals because of the unreliability of supply
and they expect to be out of palladium usage by end 2001.
J. Luben: Kimberly Day, most investors are very familiar with gold and silver and
they know that there are a number of effective ways to buy those commodities. The
average investor knows a lot less about platinum, for example, than about gold and
silver. Could you just tell us a little bit about how someone would go about
investing in platinum ?
K. Day: There are a number of ways that investors can participate in the physical
platinum market. The US Mint issues the platinum American Eagle coins that are
available in one ounce and fractional sizes. The governments of Canada and
Australia also issue platinum legal tender bullion coins called the Koala for Australia
and the Maple Leaf for Canada. Investors can purchase the coins directly from
brokers or they can participate in offshore storage programs. There is a program
right now offered by the Perth Mint in Australia that allows investors to purchase
physical platinum and store that metal offshore, for privacy, safety and security.
J. Luben: A storage account like that would be guaranteed by the government ?
K. Day: The Perth Mint Certificate Program is guaranteed by the government of
Western Australia.
J. Luben: In the U.S., the vast majority of private savings seem to be shifting into
retirement accounts. Is it possible for an American to purchase gold, platinum or
silver in tax deferred Individual Retirement Accounts?
K. Day: Yes. Actually, the Taxpayer Relief Act of 1997 allows investors, for the first
time ever, to put platinum bullion into their Individual Retirement Accounts. That
became effective January, 1998.
J. Luben: One of the big question marks in the platinum group metals is the status
of Russia. Rhona, you made the point earlier that 60% of the world's palladium
comes from Russia and a huge portion of platinum is also Russian. For a number of
years people in the market suspected that the Russians were sitting on these
enormous commodity stock piles, not just in platinum group metals but in oil, gold
and other commodities. What is your sense of it now? Do you have a feeling that a
lot of those commodities have been sold off or depleted since the Soviet Union was
disbanded?
R. O'Connell: It certainly feels like it. The general feeling in the platinum market,
for long as I care to remember, certainly for longer than a lady would dare to admit,
has been that there has only been two years of inventory left in Russia in terms of
metal that is available to come out to meet Western demand.
It has been a very long two years but it is starting to look as if they may well be
running very low on their platinum stocks. There are already conspiracy theories
running around the market as to why nothing came out last year. It does actually
sound like a bureaucratic hiccup, to be honest, rather than trying to manipulate the
market.
Obviously, the fact that they were producing last year but not selling much of it
through means that the inventory will have been replenished to some extent. So,
the market is not as tight as it might have otherwise been.
The palladium side has been more of an enigma. The market has generally been
pretty optimistic about it and taken the view that there has been masses of it there.
The latest comments which I have seen came from Barry Davison, the Chief
Executive of Amplats_ of South Africa. He said in a press interview in early May, he
didn't give precise numbers but the implication was that maybe there is enough for
maybe another four or five years but not really very much more. That is certainly a
lot less than the west had previously been thinking.
J. Luben: Does that apply to palladium and platinum, or just palladium?
R. O'Connell: That is palladium. As I say, this perennial two years may now be
actually rather more genuine than it has been in the past as far as platinum is
concerned.
Jack Luben: Jeff, if the Russian reserves have declined, which I think is a generally
accepted consensus view, what do you think the potential for new production
coming out of Russia is, going forward over the next two to three years ?
J. Christian: I guess I would take a slightly different view from maybe the market
consensus of what has been going on in Russia, but one of the things that you have
seen is that Russian platinum and palladium mine reproduction and refined
production actually have risen over the last several years. Norilsk Nickel, which is
the big producer of platinum, palladium as by-product of nickel has been shifting its
mining plan and has actually been increasing its? platinum and palladium output.
That increase may now be largely in place but you may see some further increases
in PGM output over the next couple of years.
Again, the key is, you can produce it all day long, if the government doesn't allow
you to export it, it doesn't make it to the market. So, you have seen the situation
which Rhona alluded to where Norilsk is producing the metal. Under Russian law it
sells it to the government and the government has chosen for the last year or two
to put most of that metal into rebuilding its? inventories that were depleted from the
period 1990 through 1996, maybe into 1997.
So the government has been rebuilding its? stocks. The capacity to produce metal
geologically and metallurgically is definitely there and they could increase their
production. A bigger constraint on future increases is the financial and economic
conditions within Russia and the financial and legal environment in which people
would be investing in that mine production, which has probably served as a
restraint from capital coming in and building up that Norilsk Nickel's output even
further. I am not sure that that is going to change. It is too early in the Putin
Administration to tell what exactly is going to happen.
J. Luben: One of the factors that attract investors to platinum and palladium, as
opposed to gold, for example, is that fact that in the case of gold there are large
quantities of above-ground gold held by central banks and others that always
threaten to hit the markets and abort any significant rally. Of course, in platinum
and palladium, as we discussed, there is a lot less above-ground supply.
Most of the rallies that we have seen in platinum and palladium seem to be demand
driven. I think the point was made earlier that if you look at all the major end-use
sectors for platinum, which is industrial and jewelry, those are increasing sharply. I
was wondering Rhona, do you think that the sharp increase in jewelry demand that
we are seeing, not just in a traditional market like Japan but that is now spreading
to other parts of the world, will continue?
R. O'Connell: I think on an underlying basis it is certainly likely to, as global
awareness increases. There is obviously the risk that as prices move up very
rapidly, so demand will tend to wither on the vine. With a young market there is, by
definition therefore, the possibility that if prices move too far, too fast then that
embryonic demand may be choked off and it may never actually develop.
My suspicion is that the way the market has been developing over the last 45
years, I mentioned China but particularly also in the US, it has probably taken
enough of a hold and captured the imagination sufficiently that that demand will be
sustained and hopefully will grow going forward. But, there is certainly a price
elastic response. There is no doubt about that.
J. Luben: In the case of gold, for example, the mass consumer market for gold is
offered a wide range of low cost jewelry items, in the area of, in US terms, of $100
or less at the retail level.
R. O'Connell: A lot of it low-karatage too.
J. Luben: Is that something that the platinum market can adjust to or is platinum
always going to be very expensive to the average consumer?
R. O'Connell: I think to some extent it would benefit by remaining very expensive.
The point about karatage is, certainly in the Far East and to a lesser extent the
Middle East and definitely in India, the requirement for gold jewelry pieces is the
high karatage, high quality, low mark-up and the pieces are bought on weight with
a small fabrication mark-up, done at the prevailing price. Unlike what one might
loosely term the first world, where we have karatages dropping down to 18, 14 and
I am ashamed to say nine karat in the UK, which is only 37% purity, which leads to
a large wholesale, retail mark-up so the actual value of the gold in the piece that
you buy in Europe is nothing like the underlying value of the metal.
As far as platinum jewelry is concerned, one of the important caches, which appeals
to the Japanese particular, is the fact that it is very high quality. You know that you
are buying the real McCoy and you haven't got to worry about other trace elements
which have been introduced.
There was a suggestion something like five or six years ago that a band of karats
ratings should be but into platinum jewelry and it never really got off the ground at
all. I think one of the important things about platinum jewelry is that it is high
quality material and people will pay accordingly.
J. Luben: In the US, some of the demand for platinum jewelry has gone "down
market" in terms of price for the bridal market and for coin jewelry. Could you tell
us a little bit about that, Kim?
K. Day: In terms of platinum jewelry, they have captured a big portion of the
wedding market, bridal wedding rings and engagement rings. Then there is also a
lot of product available in the upscale areas, the Tiffany's and places like that. They
have made a move to attract more mainstream jewelry consumers by getting
platinum jewelry at middle price points into companies like Zales, Fortunoff, just to
name a few.
In terms of platinum coin jewelry, it is made out of 14 karat gold bezels with pure
platinum, bullion coins in the center, so it is an opportunity for a collector, a jewelry
purchaser to buy the pure metal content of platinum coins in a nice pendant or ring
or earrings at an affordable price.
J. Luben: In the case of environmental uses, Jeff, Rhona made the point earlier
that all of the industrialized countries have become extremely sensitized to clean
air. Vice President Gore is seen around the world as a leading environmentalist.
What direction do you see the US going towards in terms of platinum group metals
(applications to the auto industry ) and could you tell us a little about whether you
think that longer term, the fuel cell technology will have an impact on the platinum
and palladium markets?
J. Christian: There is a third area too, which is non-automotive catalytic
applications. Starting with automotive industry, we have seen a tremendous
increase in the use of platinum as well as palladium and rhodium in auto catalysts
in the US and other countries. There are a variety of trends behind it.
One has been the increased number of cars being produced and sold, especially in
the US and Europe, not so much in Japan. The second one is the tighter emission
standards, which have required increased loadings. The third factor has been the
increased average engine size in that you have all of these monster vehicles, the
SUV's and such.
The amount of platinum and palladium, rhodium used in the catalysts for an SUV
are sometimes five and six times the amount of platinum and palladium required by
a typical car five years ago. So, you have seen a big increase in the amount of
PGM's, partly because of environmental reasons: we are trying to be cleaner with
our exhaust, and partly because of sort of anti-environmental things like we are
using these gigantic machines instead of passenger cars.
It is hard to say what the future will hold. I don't know that we can have too many
more SUV's on the road in the US but you definitely are seeing more metal used per
car. That is probably going to continue.
Fuel cells. I have a particularly negative view on the use of fuel cells for automotive
applications. There have been technological advances and both the operating and
the capital costs of fuel cells have come off sharply, something on the order of
90%, but they still are extremely expensive compared to other forms of power,
both in terms of capital costs and operating cost. They are relatively unproven.
People who have seen our platinum surveys or platinum quarterly reports know that
we show people that in the 1970's the platinum industry expected fuel cells to be
using half a million ounces by the middle of the 1980's. In the 1980's they expected
to be using half a million ounces by the middle of the 1990's. We are now into the
21st Century and they are expecting to use half a million ounces. I would say,
maybe not.
For both fuel cells and catalysts, they are the non-automotive applications. I think
there you have to look at things because that is probably going to be a much bigger
growth area in both fuel cells and in catalytic use of platinum over the next ten
years than in the automotive area.
J. Luben: Can you give us some examples of non-automotive fuel cells.
J.Christian: The fuel cells put on the roof of a bakery to capture the volatile
organic compounds that are put out by a bakery when it is baking its bread and
cake and such. There are environmental regulations in the US that are being
phased in in Europe and Japan and other countries as well, to try to clean up the
emissions of volatile organic compounds, hydrocarbons, nitric oxide, nitrous oxide,
carbon monoxide, carbon dioxide, from factories, dry cleaners, laundries, bakeries,
anybody that is producing these things.
In addition to that you have power plants, smaller operations, furnaces in houses.
In each application you could put a catalytic converter on it and clean up the
exhaust. Actually, since the early 1980's some states in the US have required that
if you put a wood burning stove in, it has to have a palladium bearing catalytic
converter. The states don't require it but they require a catalytic converter and it
happens to be that you use palladium in those catalysts.
The growth potential for these stationary catalysts is much greater than the
automotive catalysts because the automotive, for example in the US, we have had
automotive catalytic emission regulation since 1971. A lot of that growth due to the
regulations is there. You have incremental tightening which is leading to some
increases but it is already there.
With the stationary catalysts we are earlier in the game so you are going to have
increased usage due to the mandating by regulations of tighter emission standards.
J. Luben: I have a question for Rhona in two parts. One, do you share Jeff's views
about the prospects for fuel cells. The second question that comes to mind is, if the
palladium price has gone up by a factor of five or six in a very short period of time,
do you see the car companies substituting platinum back for palladium going
forward into the next two to three years?
R. O'Connell: As far as the fuel cells are concerned, I am more bullish than Jeff. I
am not fully sanguine about it. We have already got some vehicles on the road,
certainly on a trial basis only, the Necar for example. We have Daimler-Benz
working flat out with Ballard Power.
We are into the "cost versus environmental" argument again. Certainly in the UK, it
took a monumental political battle in the early 1980's to convince the oil industry
that they should take the lead out of gasoline because you can't run emissions
control catalyst with leaded gasoline because that poisons them. They said it was
going to cost a fortune and they couldn't do it, wouldn't do it and so on and so
forth. In the end, environment won the day.
We have got a similar argument now in the US for example, the Department of
Energy has estimated that if you convert 10% of the US fleet on the road as we
stand from gasoline to fuel cells, that would equate to saving on oil imports in the
order $6 billion per annum. We are, however, looking at saving on imports of taking
something like 20 years to work its way through the system. This is certainly not a
good rate of return. So, there is definitely going to be a fight on that score.
There is also a natural consumer reluctance to look at hydrogen as a feed stock,
whether it comes through a liquefied form in the sense that it comes from another
organic compound and which then gets refined in the car itself. Obviously, people
are concerned about the possibility of fire. There are arguments in the industry that
there is no problem with that and that they will be able to convert at not much cost
and with no safety risk. Obviously there is going to be consumer reluctance on that
score because people know about hydrogen. They know it is a gas that can burst
into flames at the merest whim.
As far as the palladium and emission control catalysts, we are already seeing some
retooling going through. It is not as difficult as might be believed: the vast majority
of auto companies have a huge range of catalysts on order from their different
suppliers. To some extent it is like a mix-and-match. Obviously it is not that simple
but one can change back from palladium to platinum with comparative ease. It
takes a certain amount of time but it is by no means out of the question. Some car
companies are already talking about it.
J. Luben: I would think Jeff, that if the industrial users of platinum group metals
are worried about the availability of palladium, you are going to see more and more
substitution back to platinum and that in the long term, platinum prices may well
out-perform palladium in terms of where they go from here,
J. Christian: I am in total agreement with that. You are seeing substitution out of
palladium into platinum. You have seen it in the auto industry. You have seen it in
electronic applications. You have seen it in some petroleum refining and chemical
process catalytic applications. It is continuing. They are concerned about platinum
supplies as well but they are less concerned about platinum supplies than they are
about palladium supplies.
J. Luben: Rhona, could you give us some sort of a price projection over the next
two to three years of where you see platinum and palladium headed?
R. O'Connell: I am looking for both of them to level out somewhere around about
$420 an ounce. We could yet have a shock in the palladium market. It is early days
yet but it does worry me slightly. It reminds me in the year 2000 of the
performance of rhodium in 1990 and silver in 1980 and the dreadful decades that
they suffered thereafter.
J. Luben: You see platinum basically trading flat to lower?
R. O'Connell: I think it is still a little bit overdone at the moment because there is
a speculative element involved. Therefore, I am calling for the price to come down.
But, from the point-of-view of the industrial underpinning of demand, I think it is
extremely healthy and I would be an investor.
J. Luben: Jeff, what is your view?
J. Christian: We have fairly higher projections. Our expectation for platinum is that
it might average around $472 this year, which would be about $100 higher than the
average price over the last two or three years. Then again, it is sort of the same
thing as Rhona in that we expect the price to sort of plateau but we have a slightly
higher plateau for platinum, we have $470 this year, $480, $485 next year. But,
with the proviso that you will also probably see much greater price volatility which,
for the shorter term investors or speculators is important because it gives them the
ability as you have seen over the last few months, to make big profits in a very
short period of time as the price fluctuates between say $440 and $540.
Palladium, we have a higher price range. We see it plateauing possibly in the $550
to $600 range, at least for the next couple of years before it comes down. That is
because, while there is massive substitution, especially in the dental alloys,
substitutability has run into some offsets rather, in other applications.
In addition to that, something which is now becoming a little bit more painfully
aware: even at $130 an ounce palladium was an expensive rare precious metal and
you only used it when you needed to. If you could substitute the nickel or
something you would do it at $120 an ounce maybe not quite as soon as you would
at $600 an ounce. What you are finding in the palladium in semi-conductors for
example, tends to be used in applications where you need a greater reliability than
base metals provide for computers, hand-held electronic devices, cellular phones,
onboard electronics in automobiles, in airplanes and things like that.
I just give you a personal, microcosmic view, my first cell phone I bought probably
in 1989 or 1990 and it died last year. I replaced it with a new phone and of course,
the cost is about one-tenth of what it was when I bought the first one and 13
months later the screen is giving out. Why is the screen giving out? Because the
semi-conductors that are standing behind the LCD are wearing out because they are
not palladium.
You are going to have a lot of consumer resistance and you have found it in the
semi-conductor business, for example. US semi-conductor manufacturers have been
more inclined to substitute out of palladium whereas the Japanese have said, "We
want to try to maintain our quality issues so we are going to continue to use
palladium for a better period of time."
J. Luben: But it is your sense that the substitutions will really be more in the area
of palladium than platinum? If anything, platinum will benefit from substitutions.
J. Christian: Platinum is definitely benefiting already from substitution out of
palladium.
J. Luben: Now a lot of investors invest in gold, silver and platinum because they
are seen as counter cyclical to financial assets. If an investor wants to keep 10% of
his money in metals, Rhona, how would you advise him (her) to build that type of
portfolio?
R. O'Connell: If you are talking about diversification of risk as opposed to
maximizing gain.
J. Luben: Let's talk about both.
R. O'Connell: Right. Diversification of risk, we have obviously encompassed the
concept of a problem in the banking system. In that case, you have got to have a
gold component in there. It is not necessarily going to make you any money, that is
certainly the way it has been behaving, over the last three years you would have
incurred capital losses. It is in the marketing man's world the money that you can
trust.
Platinum, by contrast, does have that much more volatility. Because it has a higher
industrial component in terms of its? demands than does gold, then certainly on
perception basis, if the share markets start falling apart, it might get pulled down a
little bit from time-to-time but it doesn't mean that the overall market imbalance is
over. I can't see that happening at |
