COMMODITIES & AGRICULTURE: Palladium volatility goes on: Motor vehicle makers fight against Russia's unpredictable dominance of the market
Financial Times, Nov 15, 2000
Both platinum and palladium, this year's star metals, are set to remain at around their current price levels for the next six months.
However, palladium, traditionally the more volatile, will fluctuate within a broader price band than platinum.
The Platinum 2000 interim review from Johnson Matthey, published yesterday, suggests a range of Dollars 560 to Dollars 630 an ounce for platinum, compared with yesterday afternoon's Dollars 591 London fixing, and a range of Dollars 700 to Dollars 850 an ounce for palladium, compared with yesterday's Dollars 779 fixing in London.
In New York December palladium rose Dollars 7 to Dollars 784 when Nymex opened, while January platinum opened Dollars 1.30 easier at Dollars 584.50.
The review shows how North American motor vehicle manufacturers, which are using growing quantities of palladium in catalytic converters to clean exhaust emissions, have fought back against Russia's unpredictable dominance of the market.
The companies started switching from platinum to palladium in the 1990s, when palladium was much cheaper than platinum. Thanks to the steady tightening of emission standards, total demand grew so rapidly that it soon substantially exceeded supply.
Russia, the main producer of palladium, plugged the supply gap with exports from its large state-controlled stockpile.
Between 1994 and 1999 its stockpile sales are estimated to have topped 16m ounces, and were of crucial importance given that total demand from all quarters - catalytic converters, electronics and dentistry - was just over 9m ounces in 1999.
But from 1997 Russian exports became erratic, and rumours and worries led to a rising and highly volatile market in the early months of every year.
Manufacturers hate volatility and unpredictability, so in 1998 vehicle makers developed a two-prong defence.
In the long term they planned to start switching the mixture of platinum group metals in their catalysts back towards platinum, which comes mainly from South Africa, seen as a more stable source of supply.
As ashort-term defence they started building their own stockpiles of palladium, buying whenever prices fell back. They also mopped up the palladium stocks sold by hedge funds such as Tiger, which bought early in the metal's upwards career.
This year, as market prices soared to fresh heights, they changed their strategy, and started digging into their stockpiles.
Johnson Matthey estimates that, although vehicle makers are actually using 20 per cent more palladium in their catalysts this year, they have bought 12 per cent less. As a result, total demand for palladium has dropped by a tenth, the first fall for more than a decade.
North American vehicle manufacturers are the biggest buyers of palladium and have used their stockpiles most aggressively to smooth out prices.
In the three years from 1997 to 1999, purchases rose by 36 per cent, 68 per cent and 23 per cent successively. In 2000, JM estimates that their purchases fell by 30 per cent.
"This year we have seen a significant reversal of (the stockpiling) policy, with manufacturers drawing substantially from these stocks, especially at times of the highest prices for palladium," says the report.
This analysis helps explain why prices have not risen even further, despite the apparent drop in sales from the Russian state stockpile.
Johnson Matthey says the level and pattern of Russian sales will continue to be the main influence on prices. The size, ownership and even the whereabouts of the Russian stockpile remain obscure, although Johnson Matthey thinks enough metal is available for exports to plug the supply deficit for another three years.
But analysts now have another stockpile to ponder. How large is the vehicle makers' remaining stockpile? What is the underlying level of their palladium usage and when will it peak? What will their stockpile strategy be next year?
In a few years' time the rapid expansion of South African production of all platinum group metals could loosen Russia's stranglehold over the palladium market, while platinum's increasing share of the exhaust catalyst market reduces palladium's importance.
But meanwhile, the vehicle manufacturers are adopting Russia's own weapons to defend themselves against erratic prices.
Platinum is relatively uncomplicated compared with palladium. Given the industry's ambitious expansion plans, it is reassuring that demand for catalytic converters has risen for the first time in four years, and that jewellery demand continues to rise in spite of the deterrent effect of higher metal prices.
The only jewellery market that has fallen is Japan, the metal's traditional stronghold, where gold has become the poor man's platinum. Gold is now less than half the price of platinum, and easier to work.
Johnson Matthey says that at the inexpensive fashion end of the market, young people in Japan are turning to white gold, although platinum remains the more popular white metal with those who can afford it.
In China the rising metal price has failed to kill the market, although growth has slowed.
Demand is expected to top 1m ounces this year, compared with 950,000 ounces in 1999. At this rate China could soon catch up with Japan's market of 1.15m ounces.
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