JOHANNESBURG, ’04-APR-04 22:00′ GMT ‘ – Friday’s announcement by Belgian metal refiner, Umicore, that it had developed technology that will allow palladium to replace some of the more expensive platinum in diesel autocatalysts, may have taken much of the market by surprise, but hedge funds were not among those caught napping.
Early last week, palladium traded as high as $290/oz, a gain of close to 50% on its price at the end of last year. Commentators were at a loss to explain why speculative interest in the metal had been piqued, when there was little in its fundamentals to be enthused about. The palladium market had a metal surplus of 670 000 ounces last year.
In a note on the company’s website last week, before the Umicore announcement was released, Johnson Matthey analyst Jeremy Coombes ascribed the higher prices to speculative interest.
‘We have not seen serious changed in palladium demand. I think it is funds,’ Coombes said. He added that the increased interest was a function of a growing belief that palladium demand would benefit from lower prices. ‘To the trading mind, there must be an opportunity here,’ he said.
He was right. Andy Smith, metals analyst at Mitsui Global Precious Metals in London, says speculators on the TOCOM/NYMEX futures markets have moved from a net-square position in early 2003, to a net-long of over a million ounces. ‘They are not charitable organizations and their patience may have been partly based on the expectation of just such an announcement as Umicore’s,’ says Smith. He adds, however, that the funds received little reward until the Umicore announcement pushed palladium’s price higher.
Notwithstanding the poor demand-supply picture, however, speculators might also have taken their cue from Norilsk Nickel, the world’s largest producer of palladium. Last week a Norilsk Nickel executive said the price of palladium would reach $350/oz.
Friday’s announcement affirms the increasingly prevalent view that demand for palladium will grow, improving fundamentals and shifting the price higher. Mike Bedford, chief of operations at Johnson Matthey, told Mineweb the new development was ‘inevitable’, given that several companies, including Johnson Matthey, were working on the new technology.
Bedford said Johnson Matthey’s own palladium diesel catalyst was currently being tested.
Umicore reckons the initial annual shift from palladium into platinum will be about 160 000 ounces. According to Bedford, the new technology would have the potential to boost palladium demand by as much as 250 000 ounces each year, assuming a catalyst market of a million ounces each year and a wholesale uptake of the new technology by car manufacturers. This, he said, was ‘relatively positive’ for the market.
Mitsui’s Smith believes the forecasts of palladium usage in diesel exhaust catalysis may be a little conservative. He says the diesel market is as important to platinum’s growth as the much-vaunted Chinese jewellery market. ‘Both (diesels and China) account for around 1 million oz per annum, or about one-third of total demand. And diesel-use plus China accounted for all the growth in platinum demand in the last six years. Any threat to these two growth domains is significant,’ he says.
While the switch to palladium was inevitable ‘ or so say most of the commentators ‘ given the near-record platinum prices, JM believed growing diesel car sales would offset any switch to palladium. After all, until Friday, diesel catalysts were a monopoly for platinum. That has now changed and Smith believes the Umicore ‘breakthrough’ will not be limited to 30% to 35% of the diesel catalysis market.
On balance, though, the technological innovation is good news for both markets. ‘It is a classic win-win situation for both markets,’ says one Johannesburg-based platinum analyst. It is a view echoed by Bedford. While the platinum market’s state of perennial under-supply looks only to be exacerbated by ever-increasing demand, palladium faces the dampening effects of oversupply and the legacy mistrust of dominant Russian producers. The use of palladium in auto-catalysts will not only suck up some of the palladium deficit, but will relieve some of the pressure on the platinum market.
The relief will be welcome, given that Chinese jewellery demand for the metal – which is expected to wane as prices rise – has remained stubbornly strong. ‘Umicore’s announcement will likely be welcomed by South African producers. In the last couple of days both Anglo Platinum and Lonmin have publicly suggested that, far from being a ‘safety valve’, China is now a perpetual platinum-demand machine even as prices rise,’ says Smith, who believes the Umicore announcement has relieved some of the pressure from the market.
For vehicle manufacturers, the $20 saving on each car is marginal to say the least, though they are likely to adopt the new technology once it is proven. Stephen Cheetham, a car-industry analyst at Sanford C Bernstein, told Reuters the new catalyst would not save too much money for manufacturers, as the palladium price would probably increase on the higher demand.
‘Palladium and platinum are interchangeable, palladium is not inherently cheaper, they tend to flip flop. Even if there is a price gap now, the increased demand for palladium if automakers make the switch is likely to bid it up so it is not going to save them a whole lot of money,” said Cheetham.
Palladium continued to surge upward on Monday as speculators latched onto Friday’s announcement from Belgian metals refiner Umicore, that it had developed a system for using palladium in diesel auto-catalysis. Bids for palladium in mid-day London trade scaled $310/oz, while in Tokyo, palladium futures hit 18-month highs.
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