Palladium, rhodium may come to fore 
as smaller petrol cars are...

Palladium, rhodium may come to fore 
as smaller petrol cars are targeted

http://www.miningweekly.com/article/palladium-rhodium-to-the-fore-as-smaller-gasoline-cars-are-targeted-2009-06-05


By: Martin Creamer
5th June 2009
TEXT SIZE The determination of the world to reduce 
its carbon footprint could have an 
impact on the palladium price, which currently lags many times behind the platinum 
price.

The current environmental framework is tending to emphasise the curtailment of carbon dioxide (CO2) emission, which has nothing to do with car exhaust catalysts or autocatalysis, but rather with fuel efficiency and the burning of less fossil fuel per kilometre.

The message from some in the automotive industry is that small petrol turbocharged 
engines that have a very small CO2 footprint are on the drawing boards.

But such models will demand palladium and rhodium, and not platinum. While the last decade was platinum’s decade, some, like GFMS CEO Paul Walker, believe the next 
decade could belong to palladium.

Walker’s view dovetails with Lonmin CEO Ian Farmer’s comment that the platinum-mining industry is facing a move to smaller, palladium-rich petrol vehicles as consumers downsize their cars. “The gap is also closing on fuel efficiency between gas and diesel 
engines,” Farmer says, adding that he does not believe that there will be a rebound in the platinum price before 2011/12.

These are some of Walker’s answers to Mining Weekly questions:

Platinum is heavily dependent on motorists choosing diesel-driven vehicles. 
Do you see sustainable demand for diesel 
vehicles or is the world being forced to choose smaller, petrol cars in pursuit of a lower-carbon environment?

Europe is going to remain a diesel market. The drive experience and the fuel economy of diesel is something that will keep the diesel car market fairly robust. The issue is the growth in diesel or the growth in gasoline. Platinum’s spectacular price evolution over the last six or seven years has been a function of one primary factor and one primary factor alone, and that has been the growth of diesel in Europe. Talking to the auto manufacturers in Europe and looking at the economics of the diesel sector, it seems unlikely to us that diesel is going to see that kind of growth path. Indeed, what you are starting to see in terms of the environmental framework that is coming in is an emphasis on the curtailment of CO2 emission, which has nothing to do with the exhaust catalyst or 
autocats, but with fuel efficiency and burning less fossil fuel per kilometre. What we are hearing from the automotive sector in Europe is that the future growth is going to come from small gasoline turbocharged engines that have a very small CO2 footprint, and that is a palladium and a rhodium story, not a platinum story. The last decade was platinum’s decade, in which there was spectacular price growth and really good fundamentals. Our view at GFMS is that palladium could well be about to experience its decade.

South Africa is a substantial producer of palladium. If South Africa continues to produce and grow in the way that was forecast five or six years ago, South Africa would have been on level pegging with the Russians in terms of palladium production. The interesting factor looking forward is that Russian production of palladium fell quite sharply in 2008. With the nickel price low and Russia’s structural 
issues, you could see a further decline in Russian palladium production in 2009. South Africa is not a million miles away from Russia in terms of palladium production. South Africans are platinum obsessed and they forget that South Africa is a major producer of palladium. Of course, the price differential and the revenue that platinum generates for an Anglo Platinum or an Impala Platinum do focus the mind a little bit on platinum, but in the long term – and I am taking a ten-year view – palladium is definitely a metal to keep an eye on.

Barring one year, for the last 10 or 11 years palladium has been in deficit. There has been a call on the above-ground stock. The fundamentals just from the perspective of a continuing deficit look good. But, of course, palladium’s problem is its stock levels, but at $170/$180/oz, 
I just don’t see that there is a huge amount of downside risk for palladium. Quite the 
reverse is true and I believe that there is a lot of 
upside potential for palladium. 
I would not be surprised to see them double, in particular if we see investment 
demand rising and the price of gold going higher, even with some of the other supply-
demand fundamentals looking somewhat negative.

Could you say the same for platinum?

No.

And why are you so bullish on rhodium?



Because of supply-demand fundamentals and its use. The interesting thing about the rhodium market is that it used to reduce nitrogen dioxide, or NOx, emissions from vehicles and more onerous environmental legislation is very strict on NOx emissions and the only thing that you can use to get rid of NOxis 
rhodium. Rhodium is the metal of choice, technologically speaking. Rhodium is a really 
difficult metal to get rid of. If you look at the loadings in car autocatalysts, for example, cars that complied with the European exhaust-emission standard Euro 4 four years ago compared with today, the use of both platinum palladium is significantly down by some 20% to 40%, to achieve the same legislated output, but rhodium’s use is down by a far smaller percentage. Rhodium can’t be substituted or significantly 
thrifted, rhodium’s supply and demand 
balances are very tight and, once the world’s economic problems have been sorted out in another two to three years, gasoline is going to be the growth area and rhodium is going to be a beneficiary of that.



The price of rhodium is like a yo-yo and you never know where it is going to end up. Within the space of this year, I would be surprised if you see any massive increase in the price of rhodium, simply because it is so tied to the automotive industry, which is looking really 
grim for the rest of 2009 and 2010, but the price is a function of the liquidity of these markets and rhodium is a very illiquid market, so it doesn’t take a huge amount of demand to lift the price. For example, if an astute investor looks at this and decides that the upside 
potential for rhodium is two, three or even four times higher than the current price, and that it is worthwhile taking a long position, it won’t take a lot of buying of rhodium to start pushing that price up significantly. In the case of gold, an investor would have to invest billions of dollars, but, in the case of rhodium, the 
investor would have to invest only a couple of million, and it will begin to cause the price to rise. There is very little downside risk and the potential at the moment is all on the upside.



What are platinum’s downside risks?



I think that the downside risks to platinum are actually fairly limited. If you have a look at what happened in October/November last year, the entire commodity complex was given a severe beating and platinum was just one of the casualties of war, and its price was driven 
down far lower than was sustainable and to a level significantly lower than is justified by the fundamentals of this market. But the 
important thing to bear in mind is that, based on GFMS estimates, we believed that platinum would go into surplus. But it is a relatively modest surplus against a supply picture, which is still heavily South African dependent, and the demand-side picture, though looking significantly worse in some areas, has picked up in others when the price has fallen. Automotive demand is a lot lower, which is to be expected, 
but we’ve seen compensating demand in areas like retail investment in Japan, which is significantly higher, and the highest we’ve seen probably for 15 or 20 years. These are the compensating factors. It’s a market with not a huge amount of downside risk, although the price could fall $200/oz lower.



What is platinum’s upside potential?



The upside potential is a function of investment. At this stage, the genuine drivers of the demand side, which historically has been the autocatalyst demand, is going to be a lot lower. The global economy is up the proverbial creek without a paddle, and that is going to weigh on the demand side for some time. But an interesting joker in the pack is what happens to 
investor demand. We’ve seen growth in 
exchange-traded funds, or ETFs, as a result 
of both professional and retail demand, but what has really struck me in the last six months has been the growth in the retail 
investment market, predominantly a Japanese phenomena, but still indicative of the fact that people are making a judgement call and taking a view of this market and saying, okay, we were down $780/oz, but that was not sustainable. We saw a quick bounce back from that to above $1 000/oz. They are finding that there is probably not a lot of downside risk. But if substantial investment demand does kick in – for example, on the back of a much higher gold price, which GFMS 
believes in possible – will we see prices moving to $1 300/oz and $1 400/oz? There is definitely a modest skew in favour of the possibilities of where the price is going to go on the upside rather than on the downside.



Is above-ground platinum scrap a threat to the platinum price?



The whole scrap story, on the jewellery front, is an area that I think most analysts, and I’d even put myself in this category in spite of scrap being very much at the forefront of our field research, have underestimated how much scrap could potentially come back into the market. You are quite right, GFMS was measuring scrap in the gold industry as early as 1980, when gold prices peaked. The above-ground stock and the mobilisation of the above-ground stock are crucial. As these stocks start to build up and come back to the market at the right price and through the right collection mechanism, they can have a profound influence. Just one metric that gives you a very good feel for this is the metric of South African production falling by 400 000 oz in 2008. Jewellery scrap, that is scrap with jewellery origin, 
increased by about 400 000 oz. So all the fear about lower South African production and the price impact we saw at the start of 2008 could be dissipated because of the response of 
recyclers on the other side of the supply equation. One has to bear in mind, when studying platinum, that higher prices and lower prices don’t just have a one-dimensional effect on South African mine production or on auto-
catalyst demand. Every single aspect of the supply-demand balance comes into play, and one of the reasons we do the field research we do is to pick up these – what is actually physically taking place in the market. For example, to find out what has happened to retail investment requires having to go to Japan, because that is the only way you will find out what is going on there. 
There are those surprises that could push platinum out of the $900/oz to the $1 375/oz trading range that we forecast. 
But there are supply-and-demand factors that could push the price outside of those ranges or [see] trade dominantly on one side of the distribution around the average that we are forecasting, and that’s the beauty of this market.