White Metals Offer White-Hot Opportunities

By Michael Checkan              February 23, 2006 www.assetstrategies.com

Until 1998, Palladium traded in a comfortable range of from $120 per ounce to $180 per ounce. From 1998 to 2000 this little known, sister metal to Platinum, expanded its trading range to the $250 to $350 channel.

That expansion was just the beginning…

As the “Commodities Decade” dawned, Palladium began its assault on an all-time high of $1,075 per ounce!
As you can see from the chart below, Palladium tripled in value in just one year. Also evident in the chart is the ensuing collapse in the Palladium price. The very next year, Palladium plummeted to one quarter of that same all-time high!

The Russian Federation, the world’s largest Palladium supplier, benefited immensely from the higher prices commanded by Platinum’s sister. Ford Motor Company, on the other hand, was not so lucky. Their commitment to Palladium usage in autocatalysts at the time nearly put them out of business. This experience, understood by all the auto manufacturers, surely led to a renewed commitment to Platinum which has more consistent and predictable worldwide supplies.

Consider the following Platinum and Palladium facts. Then, we will look a bit closer at what happened with these related metals in the year 2000 and beyond.

- Platinum is 15 times rarer than Gold…and Palladium is nearly as scarce as Platinum.

- Both Platinum and Palladium are used primarily to control emissions in automobile catalytic converters, and secondarily in jewelry.

- These sister metals are only mined in about 12 regions worldwide, primarily in Russia and South Africa, and to a lesser extent in the United States and Canada.

- The Russian Federation accounts for approximately two-thirds of the world’s Palladium supply.

- Russian Palladium supplies come from 3 sources – the Norilsk Nickel mine, Gokhran (Russia’s gems and precious metals reserve), and the Russian Central Bank.

- Almazyuveliexport is a state-owned monopoly that controls all Palladium exports to the world.

As sister metals, Platinum and Palladium are courted by the same end users. The leading suitor for the affections of these two metals is the auto manufacturing sector. In 2005, the auto industry consumed 46% of the world’s Platinum supply, and it consumed 45% of the world’s Palladium supply.

The jewelry industry is next in line. As you can see from the chart for Platinum below, substitution of one sister for the other has an impact on the prices of each. Palladium prices fell sharply in 2001, and, soon thereafter, Platinum prices began their rise.

In the mid to late 1990’s, auto manufacturers began to substitute Palladium for Platinum in catalytic converters because it was cost-effective to do so. Up until that time, Platinum had traded consistently at twice the cost of Palladium. However, with the Platinum price moving up, it made economic sense to adjust the composition of the catalytic converters in favor of the lower-cost but less-efficient sister – Palladium.

This change in composition in the manufacturing process does not occur by just flipping a switch. It requires time and money to retool production lines. But, with the pricing incentive in place, that is exactly what the auto manufacturers did – they re-tooled for Palladium.

The problem was that they believed they could count on consistent supplies of Palladium coming onto market. That belief was quickly proven to be unfounded.

Russian control of world Palladium supplies being what it was (and still is) was felt with a vengeance when they halted supplies due to bureaucratic wrangling over export quotas. Believe me, when the world’s largest supplier of a commodity simply stops shipping that commodity, the price will rise…and quickly!

This is exactly what happened in 2000 with Palladium. Conversely, when Russia resumed shipments, and the auto manufacturers reverted (after some time and expense) to Platinum, the price fell even more rapidly than it rose.

Opportunity Comes With an Element of Risk

Over the past four years, Palladium has traded in a range from $180 to $250 per ounce. Meanwhile, her sister, Platinum, has been steadily rising, and earlier this year, Platinum set new all-time highs at $1,085 per ounce…surpassing its 1980 high of $1,050 per ounce. With Platinum at 4 times the price of Palladium, the substitution of Palladium for Platinum is more appealing than ever.

By now, we would have expected this substitution to have already been completed, but the Russians still control Palladium world supply. With the vivid memory of halted Russian Palladium shipments lingering in everyone’s mind, it is difficult for auto manufacturers to take that step.

They chose not to substitute at a Platinum/Palladium price ratio of 2 to 1. They passed again when the ratio hit 3 to 1. At 4 to 1, the ratio is too compelling to ignore. Auto manufacturers are now beginning to herald increases in Palladium consumption for catalytic converters.

The risk here is Russian supply reliability…just as it was in 2000.

But there is more to this story this time around. That is why the risk may be one worth taking.

What’s Different This Time?

The first difference is a design change in catalytic converters. Platinum or Palladium in a catalytic converters have little to no effect at low temperatures. That is why you are instructed to drive your vehicle for a certain recommended period of time before you go to have your vehicle emissions checked. Therefore, the quicker the converter heats up, the sooner it is able to perform its function.

Newer designs place the catalytic converters closer to the engine block. This favors Palladium which has a higher melting point than does Platinum.

The second, more significant difference between now and 2000 can be summed up in one word…CHINA.

Last year alone, car sales in China increased by 50%, making China’s auto industry the fastest growing auto industry worldwide. It is estimated that by 2011, China will produce 8 million automobiles or twice as much as current production.

And China is not immune to the stringent worldwide emissions standards, especially if they wish to maintain the standards required of them to host the 2008 Olympic Games. So, more automobile manufacturing equals more auto catalytic converters. The production of more catalytic converters leads to more Platinum and Palladium consumption.

With Platinum prices at 4 times that of Palladium, the cheaper sister is looking more and more attractive. This is true in other sectors where the sibling metals are consumed as well. Of note is the jewelry industry.

When supply and demand statistics are released for 2005, most experts anticipate that we will have seen a 70% increase in Chinese consumption of Palladium for jewelry. The reason for this considerable increase in consumption is, once again, the high Platinum price.

In the past, Palladium had been primarily used with Gold to create white Gold. Now, for jewelry purposes, consumers are looking to purchase Palladium jewelry. It is a pure, white metal with similar properties to Platinum…but the price tag is a heck of a lot lower!

How Can One Invest In Palladium?

As with other precious metals, investors can purchase shares in Palladium mining companies or mutual funds that allocate a portion of holdings to Palladium mining stocks. Clearly, this is not direct ownership of Palladium, and a rising Palladium price does not guarantee a similar rise in shareholder value.

Alternatively, Palladium can be traded in the futures and options markets. However, these accounts are leveraged and - for a novice - are typically not recommended. There is potential to loose all of one’s principal and then some. These types of investments are Risky…with a capital “R.”

For most investors, ownership of Palladium bullion bars or coins is the desirable form of participation in the Palladium market. Investor-grade bars are available from major and respected refineries, and investment grade coins are available as well. Palladium Emus from Australia and Palladium Maple Leafs from Canada are both relatively easy to acquire.

Does Palladium Represent a Real Opportunity?

Investments in Palladium certainly bring with them the overhanging risk of supply reliability due to Russia’s control. However, changes in catalytic converter design, increased demand for Palladium worldwide (especially in China), and the new all-time high prices of Platinum certainly present an opportunity.

It is conceivable that even if wholesale substitution of Palladium for Platinum does not occur, increased demand for Platinum Group Metals (PGMs) alone could trigger a further rise in the prices of both these rival siblings. Since the potential volatility of an investment in Palladium cannot be ignored, Palladium is typically not a candidate for “core holdings” of precious metals. Many experts do agree that a smaller, growth-oriented allocation may be in order.

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Michael Checkan, is President of Asset Strategies International, Inc. (www.assetstrategies.com), ), is based in Rockville, MD, and specializes in the areas of precious metals, foreign currencies and overseas wealth protection. For more information, please contact Michael at 800.831.0007 or 301.881.8600. You may also e-mail him at rcheckan@assetstrategies.com.

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