The Platinum stagnates, the Palladium flies away…

set of monetary metals ingots, 3D rendering

Platinum, which experienced its golden age in the 2000s, with an increase of more than 400% in just 10 years, is now facing strong competition from Palladium in its own market.

1. The Platinum:

a. What is the Platinum:

Platinum is a metal thirty times rarer than gold. It is stronger, denser and purer than gold with a purity rate of 95% compared to 75%. Its production follows a long and laborious three-step process: the ore is extracted at depth, then crushed and ground to extract the platinum. Finally it is melted down.

To obtain one ounce of platinum, approximately 10 tons of ore must be extracted. This results in very high extraction costs. The cost of extraction is not expected to increase due to the decrease in platinum content in ores and the price of labour, which increases each year. In South Africa in 2012 a May labor strike caused the global supply to fall by 13%.

The increased costs and reduced volume make mines less profitable, causing a disinvestment by the main companies and a deficit in the markets. The platinum deficit was 270 thousand ounces in 2016, resulting in yet another decline in current stocks. The platinum market is such that a large number of mining companies cannot cover their costs if the price is below $1500 per ounce.

The main platinum mining countries are South Africa with about 140 tonnes per year, followed by Russia with 22 tonnes and Zimbabwe with 13 tonnes. World production is around 190 tonnes per year.

Zimbabwe now has the world’s second largest reserves of platinum. In 2016 the Zimbabwean government decided to build a refinery that could increase Zimbabwe’s position in the platinum market in the coming years. Platinum is a non-renewable resource with an expected end in 2064.

b. The Platinum market:

Platinum mining is carried out by two main companies. The British company “Anglo American” with 70 tons and South African “Impala Platinum” with 55 tons. Platinum demand is intended for industry (20%), jewellery (38%) and mainly for the automotive sector (42%) for the manufacture of catalytic converters. In the automotive sector, platinum reduces the toxicity of diesel vehicle exhaust gases.
2. Palladium:
a. What is Palladium:

Palladium is a rare metal, just like platinum. The production of this metal is similar to that made for platinum.

The main producers of palladium are Russia with about 80 tonnes per year, closely followed by South Africa with 73 tonnes in third place Canada with 24 tonnes. World production is about 210 tonnes per year. At this rate of extraction, the palladium deposits are expected to be depleted by 2023.

Extraction costs are much lower than platinum and are around $500 per ounce.

b. The Palladium market:

Used in dental alloys, jewellery, and electronics industries, the palladium market is the automotive sector.

Over the last decade, global demand for palladium has grown by 91%, mainly driven by strong demand for gasoline catalysts, which represents about 60% of the palladium market. The main company that mines palladium is a Russian company, “Norilsk Nickel OJSC” with 40% of world production, followed by “Anglo American” 22% and “Impala Platinum” 13%.

3. The catalytic converter:

It appeared at the end of the 1980s in response to new international regulations on pollution control. By catalysis process, the catalyst will allow the oxidation of carbon monoxide to carbon dioxide, the reduction of nitrogen oxide to nitrogen dioxide, and the oxidation of unburned hydrocarbons to water and carbon dioxide.

We are therefore arriving at pollutants that are not dangerous to health. It makes it possible to eliminate 95% of the pollutants emitted by vehicles. For this purpose, within the catalyst we have a honeycomb structure covered with precious metals (platinum or palladium) to allow catalysis.

World vehicle production is around 90 million vehicles per year. Within the latter we find between 3 grams and 5 grams of rare metals.

4. Fixing:

A major change was made in 2014. The two subjects were listed by 4 players (Goldman Sachs, BASF Metals, HSBC and Standard Bank) in the form of two daily conference calls to auction fixing under the control of the associations “London Platinum” and “Palladium fixing Company”.

Since December 1, 2014, quotations have been made by the London Metal Exchange. The purpose of this change was to allow greater transparency and avoid any manipulation of prices between the various players. Indeed, in 2015, 10 major banks were suspected of price manipulation on commodities (gold, silver, platinum and palladium).

5. Price evolution:

Using the graph in the form of Japanese candles we can easily distinguish the upward and downward trends of the two markets. We can recall the positive correlation between these two markets with the global economy.

Thus in 2001, following the bursting of the “internet bubble”, the markets experienced a sharp decline. In 2008 with the “subprime” crisis, the markets simply collapsed from $2150/ounce to $810/ounce for platinum and from $560/ounce to $190/ounce for palladium. In 2011, the “sovereign debt” crisis also slowed down both markets.

We can therefore note that the two markets have been positively correlated to the global economy, but also to each other. This correlation is more precisely linked to the automotive market. Thus in times of crisis the automotive market contracts, causing both metals to follow the same trend. Since 2016 this correlation between the two metals is no longer entirely true.
Indeed, a significant event occurred in September 2015 on the automotive market, which is the main market for these two raw materials. This is the effect of the “Diesel Gate”.

The “Diesel Gate” has overwhelmed diesel vehicles. Several manufacturers have rigged the results of nitrogen oxide emissions from their engines. This has led to a drop in sales of diesel vehicles in the first instance, and to the introduction of new, very restrictive pollution control standards, which have increased the pressure on diesel vehicle manufacturers.

Between 2012 and 2017, the share of diesel vehicle sales in France increased from 72% to 49%. The new Euro 6 standard raising the NOx emission limit from 180 mg/km to 80mg/km, the increasingly important penalty for polluting vehicles, has led to a significant drop in demand for diesel vehicles and therefore for the platinum used, 42% of which depends on this sector.

On a monthly basis, between January 2016 and November 2017, the price of platinum rose from $869.50/ounce to $942.72/ounce (+8.4%). For palladium between these same dates, it increased from $497.20/ounce to $1013.40/ounce (+103.83%). Palladium therefore more than doubled during this period.

Will palladium continue to soar to new records… ?

Source : https://fr.tradingview.com/symbols/TVC-PLATINUM/ (monthly data).

Source : https://fr.tradingview.com/symbols/TVC-PALLADIUM/ (monthly data).

Sophian DOUKKALI.

Bibliography:

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– http://www.mineralinfo.fr/ecomine/marche-palladium-enregistre-deficit-denviron-1-million-donces-en-2013

Sophian DOUKKALI


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