Platinum, palladium prices are exploding

While most industrial metals and minerals have enjoyed a good week and month, including unlikely candidates such as thermal coal and iron ore, precious metals is still where the action is.

After underperforming gold in 2016, platinum has now overtaken the yellow metal with a year to date advance of a shade under 34%. A  chunk of those gains came just the last week with the spot price climbing 6%. The precious metal was up 12.7% in July and started August with a bang to exchange hand $1,162 an ounce in early afternoon trade on Monday, making it the best monthly performance since 2012.

Sister metal palladium has enjoyed its best month for nearly a decade, soaring 21.1% in July. Its performance for the month constitutes the bulk of its gains year to date and measured from its January 12 low the metal is up an astonishing 52% or $250 an ounce trading at $717.50 on Monday.  From trough to peak in 2016, palladium is now even besting silver,  the best performing precious metal.

The price of palladium reached 13-year highs above $900 an ounce in September 2014 after a gruelling 20-week strike by South African workers and amid rising tensions with Russia

The rise in PGM prices (for little traded rhodium the news is not great however) is more surprising given the fact that unlike on the gold market, physically-backed exchange traded funds have been shedding ounces for more than a year.

There were some inflows for palladium ETFs in July, but year to date 120,000 ounces have been pulled out leaving total holdings at 2.2 million ounces, roughly 800,000 below this time last year.  Platinum ETFs have lost around 80,000 ounces year to date at 2.3 million ounces, with nearly half of those net redemptions recorded in July.

Platinum and palladium prices tends to be volatile thanks in part to a highly concentrated supply environment. Together Russia and South Africa control between 70% and 80% of the world’s supply of PGMs. The structure of supply has not altered in any substantial way since the 1970s when platinum and later palladium came to the fore as an important part of the world’s automobile industry.

The rise in PGM prices is more surprising given the fact that unlike on the gold market, physically-backed exchange traded funds have been shedding ounces for more than a year

Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets, where diesel hardly features in the passenger vehicle segment. Roughly 75% of palladium demand is from the autocatalyst sector. Platinum loads are higher in diesel engines, but on a proportional basis the auto industry represent 50% of total demand with jewellery responsible for the bulk of the remainder.

South African platinum miners are currently locked in collective wage negotiations. The price of palladium reached 13-year highs above $900 an ounce in September 2014 after a gruelling 20-week strike by South African workers and amid rising tensions with Russia. The strike idled nearly 60% of global supply and pushed platinum to highs above $1,500.

Speculation about the impact of China's introduction of some of the most stringent vehicle emissions regulations have also buoyed sentiment towards PGMs. While the US automobile market has seen strong growth in recent years, China's car industry, the world's largest, recorded a 18% jump in sales in June and could grow by double digits for the year to top 23 million vehicles.

There are also warnings that the price increase could have been mainly speculative. Analysts at Capital Economics points out that net-long positioning in the futures market increased dramatically over the past month, suggesting that prices could be vulnerable to a correction should investor sentiment turn.