Platinum, palladium prices pounded again

Sister metal palladium also pulled back on Monday with Nymex September contracts exchanging hands for $720.60, down 1.7% or $12.20 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 returned to a bear market.

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.

Some of the weakness in PGMs can be ascribed to slowing autosales in Europe where consumer confidence has taken a hit over worries about Grexit, but the US car market is on track for the highest growth rate since 2001 and annual sales of 17 million.

China, is the world’s largest and fastest growing vehicle market and although growth has slowed, predicted annual growth of some 6% through 2020 should see sales inside the country reach some 32 million units per year by the end of the decade.

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

Despite higher South African output most analysts believe the market will be in deficit again this year with estimates ranging from The World Platinum Investment Council 160,000 ounces at the low end to more than a million ounces undersupply according to UBS and Standard Bank.

At more than 1 million ounces the deficit in platinum in 2014 was the largest ever recorded with data going back to 1975, while the palladium market will be in deficit this year for the fourth year in a row.

While the futures market has been surprisingly weak retail investors have embraced the metal.

Unlike gold ETFs which experienced another bad year of outflows in 2014 and so far this year, platinum and palladium ETF investors chased ounces in 2014 adding 17% to their holdings to a record 2.9 Moz.

Palladium holdings soared over 40% or 900,000 ounces to more than 3 million ounces at the end of the year thanks to the launch of two South African palladium ETFs.

Disappointment over soft PGM prices despite a landmark year meant 2015 had a rough start, but demand has since recovered somewhat.

The current price weakness has surprised many industry watchers and longer term PGMs should benefit from strong fundamentals as the two graphs from investment bank Credit Suisse indicate.