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Platinum (Pt) and
palladium (Pd) are the two most commonly used of
the six platinum-group metals (aka platinoids), which
also include rhodium, ruthenium, iridium, and osmium. As a group, these
metals are rare in the Earth’s crust, silvery-white, malleable, and
dense. They are highly resistant to wear, oxidation, and corrosion, have stable high-temperature and electrical
characteristics, and exhibit catalytic properties.
The two metals are produced from primary mines and
as byproducts from nickel and copper refining. They occur in unusual and
specific geological environments in relatively few places on Earth. The
largest deposits currently exploited are the Bushveld
of South Africa, Norilsk in Russian Siberia, Great Dyke of Zimbabwe, Sudbury,
Ontario, and Stillwater, Montana.
According to USGS estimates, 2012 platinum mine
production was 179 tonnes and palladium was 200 tonnes, down 8% and 7% from respective 2011 levels.
Recycling constituted about 29% of total supply. However compared to 2012
gold production of about 2800 tonnes, these are
small markets supplied by a few big mines and companies.
South Africa dominated production at 74% with Russia
at 13%. Remaining supplies came mostly from Zimbabwe, Canada, and the United
States. Palladium mine production came from South Africa at 41% and Russia at
40%, followed by Canada, the United States, and Zimbabwe.
As with many commodities, the United States is
largely dependent on foreign supplies: 91% of our platinum and 54% of
palladium consumption are imported. We consume nearly half of the
world’s platinum and 30% of its palladium supplies.
Because of their rarity and physical properties,
platinum and palladium are considered precious metals and used in jewelry and
investment coinage. However because demand is dominated by industrial
applications, they are actually hybrid metals. Industrial use is
overwhelmingly for chemical catalysts and dominated by exhaust systems for
automobiles and trucks.
In 2011, platinum use stood at 38% for
auto-catalysts, 31% for jewelry, and nearly 6% for ETF investments. Other
important demand came from the glass, chemical, electronics, petroleum, and
medical industries.
Palladium use was dominated by auto-catalysts at
71%. The electronics industry consumed 16% and dental, chemicals, jewelry,
and minor uses constituted the remainder. There was a significant net outflow
from ETF investments in 2011.
Because much of the world’s supplies come from
geopolitically unstable, corrupt, and/or
unfriendly countries and are dominated by a few major mines, districts, and
companies, platinum and palladium are subject to supply and demand imbalances
and price volatility:
 
Data
Courtesy of Kitco.com
Since the price of gold was floated on world markets
in August 1971, the platinum to gold price ratio
(Pt : Au) has been greater than one (>1.0) about 85% of
the time. Average monthly price ratios since 1970 are charted below:
Ratio reversals (<1.0) occurred at various time
periods lasting from over two years to a one month spike in December 1992
when the historic low was set at 0.78. The most recent reversal was from
November 2011 thru mid-January of this year.
Since 1970 the price ratio of platinum and palladium
has varied generally between 2.0 and 5.0, largely reflecting palladium’s
inherent price volatility compared to platinum:
Palladium price was fixed at the nominal price of
gold ($35-36/oz) until mid-1972. From January 2000
to mid-2001, historic lows less than one (<1.0) occurred when rumors
spread that Russia would cease stockpile sales to the West. Hoarding by
American auto companies caused the price to briefly soar over $1000/oz. But
then Russia’s balance of payments suffered, palladium was dumped on the
market, and the price went parabolic. By July 2003, the metal reached a
monthly average low of $162/oz. Ratio disruptions on the high side (>5.0)
occurred in 1983-1984 and when auto industry demand collapsed during the
global economic crisis in early 2009.
My interest perks whenever an anomalous Pt : Au
ratio (< 1.0) occurs over a significant time span. This indicates that
platinum is oversold and presents a buying opportunity. Such was the case
beginning in November 2011; only recently has the ratio gone back over 1.0.
Several factors have caused platinum and palladium
prices to rise substantially since early August:
· In 2012, South African
and Zimbabwean miners engaged in widespread, violent strikes resulting in
severe supply disruptions and constrained market supplies.
· An estimated 60% of South
African mines currently operate at a loss or at break-even.
· Economic conditions in
the United States and China continue to improve and that has stimulated
automotive sales and increased demand for platinoids.
· Increasing environmental
regulation of the auto industry in emerging market countries has resulted in
higher demand, especially for palladium.
· Although information from
Russia operations is closely guarded and always opaque, it has been widely
reported that historic palladium stockpiles are depleted and exports will
cease this year.
· Analyst consensus for
significant 2013 supply deficits in both metals has led speculators to
accumulate net long positions.
In my opinion, there is a new price paradigm
developing for platinum and palladium. The supply-side case is particularly
compelling with the economic viability of most primary platinum-palladium
mines not economic given current price regimes. Unless prices rise
substantially, South African supply disruption will evolve into long-term
destruction. The bullish case is strengthened if Russian palladium exports
are indeed ending.
To my knowledge, there are no new major mines that
can replace these looming reductions in platinoid
supply.
For a myriad of reasons, I maintain an ebullient
view of platinum and palladium supply and demand fundamentals and predict
that prices will remain robust for the short- to mid-term.
P.S. If you want to learn more about my evolving
views of the platinum and palladium markets, check out these interviews: August 10, 2010; August 25, 2010; October 14, 2011; November 14, 2011; September 12, 2012; and February 14, 2012.
Ciao for now,
Mickey Fulp
Mercenary
Geologist
Acknowledgement: Michelle Lopez is the editor of MercenaryGeologist.com.
The Mercenary
Geologist Michael S. “Mickey” Fulp is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the
University of Tulsa, and M.Sc. Geology from the University of New Mexico.
Mickey has 35 years experience as an exploration
geologist and analyst searching for economic deposits of base and precious
metals, industrial minerals, uranium, coal, oil and gas, and water in North
and South America, Europe, and Asia.
Mickey worked for junior explorers, major mining
companies, private companies, and investors as a consulting economic
geologist for over 20 years, specializing in geological mapping, property
evaluation, and business development. In addition to Mickey’s professional
credentials and experience, he is high-altitude proficient, and is bilingual
in English and Spanish. From 2003 to 2006, he made four outcrop ore
discoveries in Peru, Nevada, Chile, and British Columbia.
Mickey is well-known and highly respected throughout
the mining and exploration community due to his ongoing work as an analyst,
writer, and speaker.
Contact: Contact@MercenaryGeologist.com
Disclaimer: I am not a certified financial analyst, broker, or professional
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