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Most Analysts See Platinum Outperforming Still-Strong Palladium

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Editor's Note:(Kitco News) - Analysts tend to see platinum outperforming palladium in 2018, eventually regaining a price premium or at least closing the gap with its sister metal, although they also look for palladium to hold near historically high prices as the market remains in an annual supply deficit.

Heading into the new year, analysts tend to describe platinum as undervalued and with potentially supportive influences, such as good demand for diesel-powered vehicles but financial factors restraining any growth in mine supply.

Palladium soared in 2017 and established a price premium over platinum this fall for the first time since 2001, with this advantage widening to more than $100 an ounce. The main industrial use for both precious metals is catalytic converters to scrub exhaust from motor vehicles. Palladium is used in gasoline-powered cars, popular in the U.S. and Chinese markets, whereas diesel vehicles require platinum.

TD Securities looks for platinum to average $1,056 an ounce in 2018, while palladium averages $1,019. HSBC sees platinum averaging $1,055 in 2018 while palladium averages $975. Commerzbank listed a higher 2018 average for palladium at $1,010 versus $975 for platinum, but nevertheless looks for platinum to catch up late in the year, with both metals seen averaging $1,000 in the fourth quarter.

“We think that platinum really starts coming into its own in the second half of 2018,” said Bart Melek, head of commodity strategy with TDS.

He cited continued strong economic activity in Europe, where diesel-powered cars requiring platinum are popular, and expectations for no meaningful growth in platinum-mining supply.

“One big reason we think that platinum outperforms a bit here is that it is just underperforming so badly,” Melek said. “We’re in a situation where a majority of production is under water in terms of covering costs. In palladium, for the most part, everybody is making money.”

Further, HSBC pointed out, low platinum prices have meant less investment on mines, which in turn eventually will take a toll on mine supply.

Palladium’s supply/demand fundamentals remain favorable but most analysts said this has already been factored into prices, thus do not list average forecasts far above where the metal has been trading during December.

“We don’t think it [the palladium price] has a whole lot of room to grow. Meanwhile, platinum does,” Melek said.

Additionally, Melek described himself as upbeat about gold prices for 2018. And if gold rises, platinum tends to benefit more from spillover safe-haven demand than palladium. He also cited potential for a modest increase in platinum-jewelry demand, which tends to hinge on economic activity.

"We regard platinum as being oversold and look for a recovery in prices," said James Steel, analyst with HSBC, in the bank’s 2018 outlook report. Meanwhile, he continued, palladium may be “vulnerable to profit taking.”

Meanwhile, Societe Generale listed a 2018 palladium price forecast of $985 and a platinum average of $950. Analyst Robin Bhar said he looks for palladium to mostly maintain its price premium.

“I think it will continue, although we still think that platinum is undervalued for a number of reasons,” Bhar said. He later added that there “may be room for platinum to close the gap or even move back to a premium,” but not on a sustained basis.

Bhar said “the fundamentals are so superior for palladium that it’s going to win hands down.” Palladium is acting almost like a base metal and likely will continue to benefit from optimism about this type of demand, he related. Further, SocGen has a “slightly bearish” outlook on gold for 2018, which could in turn hold back platinum, Bhar added.

TDS projects the palladium market deficit could be up to 1 million ounces in 2018 after a roughly 800,000-ounce deficit this year. Platinum’s surplus is expected to be around 90,000 ounces in 2018 after 100,000 in 2017.

Societe Generale is forecasting a roughly balanced platinum market in 2018, while the bank sees palladium in a 1.7 million-ounce deficit after 1.6 million-ounce in 2017.

HSBC forecast a platinum deficit of 191,000 ounces in 2018 after a 115,000-ounce surplus in 2017. The bank sees a 2018 palladium deficit of nearly 1.2 million ounces after a deficit of 680,000 ounces in 2017.

One factor that could influence platinum would be moves in the South African rand, Bhar commented. If the rand strengthens, this could support dollar-denominated platinum prices. South African producers, who account for some three-quarters of the world’s output, would then get less rand for the dollars, hurting their bottom lines at a time when they are already struggling financially. All of this means potential for reduction of unprofitable output.

Should palladium remain more expensive, auto manufacturers may start to shift toward more use of platinum in catalysts. Typically, however, companies tend to wait before such substitution to make sure the price difference lasts, due to plant costs for a switch-over, analysts said.

As 2017 winds down, there is increasing market conjecture about the day when the auto sector may switch over to electric vehicles, which would not need catalysts. However, Melek pointed out, based on current production schedules, the composition of the auto fleet will not change quickly, meaning little impact during the next five to 10 years. In the meantime, he continued, there are likely to be increased loadings of platinum group metals in catalysts to meet higher anti-pollution rules in a number of nations.

Further, Melek added, many of the so-called electric vehicles are hybrids that would still use fossil fuels, meaning PGMs would still be needed. And, some analysts pointed out, increased development of fuel cells may well require more use of platinum.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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