First and foremost, the driving force that will send these metals higher is none other than the war cycles that I have been pounding the pavement about.
Those war cycles are now starting to turn the markets on their heads. They are impacting every market on the planet and threatening to send almost all of them substantially higher.
But with platinum and palladium, you also have some very unique fundamentals coming into play.
First, both metals are in what is called a structural supply deficit. That’s when supplies are limited and getting even more limited — and there isn’t much that can be done about it.
The chief reasons platinum and palladium are in a structural supply deficit are:
A: As I mentioned last week, the ore grade of the platinum group metals, that is the amount of the metals found in ore, is declining rapidly, with a plunge of more than 50 percent in ore grades in Russia and South Africa combined since 1998.
B. It takes as long as 10 years to open a new mine. Gold and silver mines take anywhere from five to seven years typically, but not so with the white metals group.
There are additional environmental concerns, different equipment used, and in both Russia and South Africa, the bureaucracies can often lead to major delays in opening new mines.
|Putin will not hesitate a second to use platinum and palladium supplies in retaliation to economic sanctions from the West.|
C. Inventories are already being squeezed, with platinum demand expected to exceed available supplies this year by 705,000 ounces, while palladium demand is expected to exceed supplies by a huge 959,000 ounces this year, more than double the official 455,000 ounce deficit in 2013.
Second, this structural long-term supply constraint is only going to get worse, for the following reasons:
A: South African labor strikes. They’re pretty frequent these days and they are putting a serious crimp in South Africa’s production, at times shutting it down. At Impala, for instance, operations were recently halted due to the worst worker strikes since the end of apartheid in 1994.
B. Soaring demand from the auto sector. Both platinum and palladium play important roles in pollution control, especially in the auto sector.
And the auto industry’s demand for both metals is off the charts, with 2013 showing the industry’s demand for palladium exceeding available supplies by as much as a half million ounces.
At the same time …
C: Investment demand is rising sharply, largely due to China. According to HSBC Bank and the latest data, Chinese investment demand for platinum recently hit a 30-month high, increasing 11.2 percent to a total of 69.98 metric tons for the three quarters of 2013 ended September 30. Palladium inflows hit an eight-month high.
In addition, investment demand globally, overall, rose 9.1 percent — largely due to the advent of trading of the new South African ETF, NewPlat.
NewPlat is traded on the Johannesburg Stock Exchange and tracks platinum’s price in rand, which has made it a very attractive investment, not only for South African investors, but also South African and Russian platinum group companies that use the new ETF for hedging and delivery policies.
Is it any wonder that the war cycles could make platinum and palladium such explosive markets?
I don’t think so, especially when you consider the strategic importance they play in the world and that Russia is such a major producer of both metals.
Russia, supplying 42 percent of the world’s palladium, is already in a supply crunch, with the country’s above-ground inventories having fallen from roughly 1.5 million ounces in 2007 to as little as 100,000 ounces at the end of 2013.
Russia’s platinum figures are tightly held state secrets so there are no reliable estimates available, but I think it’s safe to say that Russia’s platinum stockpiles have seen similar declines.
Most importantly, however, is the Putin factor. Putin will not hesitate a second to use platinum and palladium supplies in retaliation to economic sanctions from the West.
He hasn’t thus far, but he’s no dummy. Withholding those two metals from the global markets could wreak some pretty hard financial damage on several major European and U.S. multinational companies, particularly in the automotive and pollution control industries — so I am sure he is keeping those cards close to the vest and will use them when the time is right.
Bottom line: Platinum and palladium are shaping up to be major bull markets.
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