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With the big and rapid increase in platinum prices over the past month, an analyst’s thoughts turn to substitution, and here some of the likelihoods of increased palladium for platinum substitution in the catalyst and jewellery sectors are examined.
Author: Rhona O’Connell
Posted: Wednesday , 13 Feb 2008
LONDON -
After the dramatic spikes in the precious metals sector in 1979 and 1980, it took six years for gold jewellery demand to return to 1978 levels, and silver took considerably longer, with industrial demand (including jewellery) not regaining 1978 levels until 1990, a full decade after the price hike that carried gold to $850 and silver to $50. What is thus the prognosis for platinum this time around?
The frenetic activity in the platinum market with prices continuing to register new records means that, despite the fact that palladium is being pulled along in platinum's wake; the price differential between the two has now exceeded $1,500. Put another way, platinum is now almost 4.5 times as expensive as palladium and the word "substitution" is on many lips. The obvious areas for substitution are the jewellery sector, and emission control catalysts. Both of these sectors have been looking at the interplay between the two metals for a number of years and in the automotive sector in particular engineers are constantly looking for ways to maximise catalyst efficiency while minimising costs.
Back in 2000 and 2001 palladium rocketed to more than $1,000 an ounce when automotive manufacturers in North America were panicking over a potential shortage of metal. Palladium reached a maximum premium over platinum of $475 on 26th January. Over the preceding year platinum prices rose by 34% while those of palladium by 124%.
The result was renewed efforts to shift back towards platinum in the automotive sector, although the pattern was different with respect to jewellery, where outright prices were playing more of a role than the proportional difference between the two. GFMS Ltd reports that industrial demand for palladium in 2000 was 9.6 million ounces (298 tonnes), with emission control catalysts accounting for 6.0 million ounces or 63% of total. Note that GFMS records "consumption" whereas the Johnson Matthey figures refer to sales into the industry and so the parameters are slightly different, with inventory shifts marking the major difference between the two sets of figures.
Palladium demand since then has dropped to approximately eight million ounces per annum, with offtake in emission control catalysts falling to 4.1 million ounces in 2005 before starting to increase once more. The drop in palladium usage in emission control catalysts between 2000 and 2005 was thus 31% or an annual average of almost 8% per annum. This is despite the fact that the number of vehicles fitted with emission control catalysts increased by 14% overall, or an average of 2.6% per annum over the period.
Platinum demand in emission control catalyst over the same period rose from 2.2 million ounces to almost four million ounces and has continued to expand since. This is not only a function of platinum re-substituting in part for palladium, but also due to the fact that diesel vehicles have been taking an increasing proportion of the global fleet and, until recently, emission control for diesel-powered vehicles was the exclusive domain of platinum. In 2000, diesel accounted for only 18% of global production of light vehicles, and for 19% of catalyst-bearing vehicles. By 2007, diesel accounted for 24% of total and 25% of catalyst-bearing vehicles.
The geographic split of this is also interesting with Europe well and truly in the vanguard with respect to diesel vehicles. In 2000, diesel accounted for 37% of light vehicle production, but in 2007 it absorbed approximately 51% of total. The headway in the gasoline sector in China means that diesel share has actually dropped over the period, from 21% to 16%. In Japan the share is less than 10% while in North America it is less than 5% - although this us up from less than 2% in 2000.
The balance between palladium and platinum usage in diesel is changing, with advances in fuel technology now meaning that palladium can substitute for platinum (up to about 25% of total) in catalysts for diesel-powered engines, and the recent relative price performance for the two metals is virtually guaranteed to ensure that this work will continue. Furthermore the massive increases in gasoline prices has, as well as resulting in consumers looking in part, for smaller vehicles than hitherto when changing their cars, meant that diesel is now taking more of a foothold in north America than previously and the 5% figure noted above can be expected to increase.
All of this points to a resurgence in palladium demand at the expense of platinum. Although we have noted that this trend is already underway, however, it is important not to get too carried away by the speed with which this substitution will have an impact on the market. New designs for emission control catalysts frequently require new engine calibration and certification and this can take months. There was already likely to be a notable increase in palladium usage in diesel emission control catalysts; this is likely to be extended in 2009 as a result of price shifts.
The jewellery sector is more rapidly responsive to price exchanges although as noted above this tends to be more a function of outright prices rather than relative performance. Absolute high prices across the precious metals spectrum are likely to impinge on jewellery demand in all metals this year, and the platinum price romping towards $2,000 is likely to have a substantial effect on platinum jewellery demand. Palladium is likely to take an increased market share at platinum's expense, but the market itself is likely to be smaller as a result of consumer resistance. The one area that is likely to remain resilient is the market for wedding bands, especially in Asia.
Platinum jewellery demand reached a peak in 2002, driven by burgeoning interest in China and reaching almost three million ounces or 39% of total industrial demand of 2.8 million ounces. Palladium demand in the jewellery sector stood at that point at 337,000 ounces. Platinum demand has tapered off since, dropping below 1.8 million ounces while palladium offtake has increased towards one million ounces. Platinum jewellery usage has therefore declined by roughly one million ounces per annum while that of palladium has increased by more than 600,000 ounces. Palladium pieces are typically lighter than those of platinum, so palladium's encroachment in terms of the number of pieces is likely to be higher than these bald tonnage figures would suggest. Global jewellery platinum demand is currently equivalent to roughly 22% of platinum demand and 12% of palladium demand.
With South African platinum supplies likely to be restricted by anything up to 300,000 ounces this year, (dependent upon the analysis that one chooses to read) as a result of the power supply problems, then all other things being equal, i.e. if jewellery demand were the only variable in the equation, it would have to contract by almost 20% in 2008 in order to offset the reduction in primary supply of refined metal. Furthermore ETF demand is likely to remain strong. Demand so far this year in the London-based platinum ETF has been 123,000 ounces, taking holdings up by 88% over the past six weeks. This is hardly likely to be sustained throughout the year as a whole, but it already points to sustained tightness in the platinum market.
While it is too early yet to quantify the absolute shifts within the platinum and palladium markets this year, we can be reasonably sure that platinum prices will remain high and that jewellery demand will suffer. The cautionary note, of course, is that when the market rids itself of this tightness then there is scope for plenty of profit taking and this, on the back of a weakened jewellery market, is likely to lead to falls every bit as rapid as their recent rise.
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