Mining and Inventory Increase Needed to Balance Demand in Platinum-Palladium Markets

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). The average cost of refined production of platinum group metals (PGM) rose by 51% in 2003, which was equivalent to $108/oz over 2002 figures. This increase was a result of the strengthening South African rand currency and a range of operational problems according to the GFMS Platinum and Palladium survey 2004, just released in Johannesburg and London.

Platinum mine production grew by just under 1%, while palladium production fell by almost 2% as a result of grade declines and operational problems. South Africa accounted for 78% of the world's platinum mine production and 39% of palladium mine production. Russia accounted for almost 14% of platinum and 42% of palladium mine production. In South Africa, production costs rose 17% in rand terms in 2003, but the rand's strength against the dollar hiked cash costs 62% said the survey.

The South African 'basket PGM price', calculated on a weighted base according to the production of each metal, resulted in a 20% reduction in local price and contributed to a squeeze on margins. This will have a lingering effect on the market following the fact that Anglo Platinum (JSE:AMS) (Johannesburg, South Africa) scaled down its expansion plans in December 2003 citing the strengthening of the rand by 50% against the dollar from a low point in 2001. Despite this volatile financial environment, the South African mining industry sustained a 5% annual increase in platinum and palladium between 1999 and 2003.

North American producers who represent 5% platinum and 15% palladium production saw margins slashed by 73%. GFMS said that their received 'basket price' dropped substantially as a result in the slide on dollar palladium prices. Palladium averaged $337.07/0z in 2002 and 200.52/oz in 2003 - a 41% fall. This more than offset the $151.26/oz (28%) increase in the average dollar platinum price because of the palladium :platinum ratio. It is interesting, and perhaps surprising, to note that roughly the same tonnage of palladium and platinum (platinum 5.92 million oz - palladium about 5.5 million oz) was mined in 2003. Many would have guessed that palladium volumes would have been much higher than platinum.

Both PGM metal's markets are in fundamental deficits that have to date been met by the mobilization of above ground inventory, principally from Russia and the automotive industry. GFMS said that the key issue is for how much longer these circumstances will exist. Figures show an electronics and auto scrap 're-cycle 'iceberg' from the late 1980s and early 1990s moving through the market as a passing resource. PGM deficits have so far been met by the mobilization of above-ground inventory, in the main from Russia and the automotive industry.

If all plans are met, increases in mine supply should erode platinum's deficit. If this does not happen price strength will choke demand with jewelry the most likely casualty. Palladium has seen a reduction in electronics and auto usage and a 14% increase in production since 2000. Despite some above ground inventories and global resource stock movements there is no firm evidence on future available inventory. The key for palladium lies in expanded mine and scrapped emission control catalyst supply. If this is not sufficient to satisfy consumer needs than the palladium price will rise.

Demand for PGM metals in 2003 showed some flat spots and a couple of dramatic recoveries. Platinum's use in glass rose by 66% as a strong market for LCDs. Palladium demand in electronics rose by 35% (still only half the level of 2000) as it returned to favor with manufacturers of multi-layered ceramic capacitors. Production of catalyst bearing vehicles globally in 2003 was sluggish rising by just under 2%. Platinum demand in jewellery was reduced by 9% while the use of palladium in jewellery rose by 8%. This, says the survey, reflects an adverse price-elastic response in the platinum market and the increases use of palladium in white gold, as an alloying element (25% in 18 carat white gold) plus an embryonic market in China for palladium jewellery.

The overall forecast is that the prevailing price differential between platinum and palladium will narrow and that consuming markets are already responding to the massive premium that platinum currently commands over palladium.

See related May 12, 2004 news item: Platinum-Palladium Survey Sees Convergence of Application and Price in Auto Catalyst Industry.