Platinum, palladium price drop accelerates

Sister metal palladium was harder hit with Nymex September contracts exchanging hands for $637.20, down 2.5% or $16.30 to the lowest since February last year. The price of palladium jumped to 13-year highs above $900 an ounce in September last year, but has now retreated far into bear territory trading at the lowest since November 2012.

Platinum’s primary use is in catalytic converters to reduce emissions – specifically for diesel vehicles – and Europe’s automakers are the top consumers of the metal. Diesel engines represent 50% of the market in Europe. Palladium finds more application in gasoline engines and is therefore more exposed to the Chinese and US markets.

China, is the world’s largest and fastest growing vehicle market and before the latest dent to consumer confidence was predicted to grow some 6% through 2020, topping 30m units by the end of the decade.

But the Shanghai and Shenzen stock market rout which has wiped out more than $2 trillion in value could halt this momentum.

The most striking feature of the Chinese equity market is the dominance of individual investors – some 90 million Chinese hold stocks directly and many bought shares on credit.

Another factor putting the market under pressure is South African production of platinum has now returned to levels ahead of the crippling five-month strike in 2014.

While statistics for May show PGM production down 8% from the previous month, the country is producing 88% more of the precious metals compared to this time last year.

South Africa produces more than 70% of the world’s platinum and together with Russia control nearly 80% of primary PGM production.

Many analysts have been surprised by the weakness in the platinum and palladium price given forecasts of continuing supply deficits.

HSBC and UBS both cut their price outlook this week, but the investment banks’ reduced price forecasts are still way above today’s prices.

HSBC analyst James Steel on Wednesday predicted a longer term rebound thanks to “ongoing structural production/consumption deficits, notably in palladium, [which] will eventually encourage investors back into the market. Above ground stocks while apparently ample are eroding and may reach a point where prices are driven higher.”

Switzerland’s UBS in its Thursday research note argues that a “general uptrend can be justified by fundamentals. However, the palladium market is relatively small and liquidity can often become an issue – this suggests that investor positioning is naturally prone to becoming overextended relatively quickly and price action can easily be overdone.”

UBS sees palladium going to $770 an ounce and platinum strengthening to $1,160 by year-end, while HSBC sees $800 and $1,170 respectively.