Platinum Group Metals: The GM Angle

June 15, 2009

Prices of platinum and palladium have soared recently to their highest levels since November 2008. So why is GM's bankruptcy partly to blame?

  • Behind the automotive connection
  • Playing the platinum-palladium spread
  • How the only U.S. PGM miner has fared

 

6-Month Prices For Platinum And Palladium

6-month Prices for Platinum and Palladium

Source: Kitco.com

 

Last week, prices of both platinum and palladium climbed to their highest levels since November 2008-buoyed, in part, by the announcement of General Motors' bankruptcy.

If it seems odd that the bankruptcy of a huge customer would be good for a commodity, that's understandable. As we've talked about before, the majority of platinum and palladium demand - 60% last year - stems from automobile manufacturers, who use the precious metals to construct catalytic converters (the parts that clean up toxic exhaust fumes). And according to a recent report by industry researcher Johnson Matthey, platinum demand for auto catalysts dropped 8.2% last year alone. Should GM get bogged down in drawn-out bankruptcy drama, you'd expect demand to plummet even further.

So why are prices rising? Like all precious metals, platinum and palladium have seen a significant boost recently from investors looking for hedges against the increasingly likely threat of inflation. But hope, too, has made a difference: So far, GM's bankruptcy has proceeded swiftly, spurring optimism that the world's second-largest automaker can make quick work of its bankruptcy and reemerge stronger and more competitive than before. If it does so, then auto demand too might soon recover - as well as demand for palladium and platinum.

Already some signs of rejuvenation have begun to appear in global auto demand. In April, car purchases were way up in Brazil, India, even Canada. Chinese drivers in particular can't seem to get enough cars; passenger vehicle sales, encouraged by tax cuts and subsidies, skyrocketed 47% last month, the largest increase since 2006. Bloomberg even reported stories of lines wrapping around dealerships, and waiting lists two months long for the hottest new models.

 

Supply And Demand: A Tale Of Two Metals

Platinum and palladium are typically talked about in the same breath, and for good reason: The two metals have tracked each other with a higher than 90% correlation for the past two years. They come from the same mines, share similar chemical properties, and are used to make the same automobile parts.

And yet, their prices wildly differ. On June 10, 2009, platinum (up 36% for the year) closed at $1,291; on the other hand, palladium (up 38% for the year) closed at $254.

"The main difference between platinum and palladium is the supply," Rob Kurzatkowski, senior commodities analyst at OptionsXpress Holdings, told Bloomberg last week.

Currently, he explained, the palladium market is oversupplied, with a surplus of 460,000 ounces in 2008 despite an uptick in demand. Platinum, on the other hand, is at a deficit of 375,000 ounces.

As of June 10, 2009, the spread between platinum and palladium prices hit $1,037. Although automakers currently prefer platinum for catalytic converters, as that price differential continues to rise, they could switch to palladium to contain costs. (Learn more about the fundamentals of the platinum-palladium ratio in "Platinum's Poorer Relation: Palladium.")

"Platinum is a more effective catalyst. It has better qualities than palladium, but if price becomes the major concern, manufacturers can always switch to palladium," said Kurzatkowski.

Recently, the longstanding correlation between the two metals has begun to diverge, with palladium outperforming platinum over the past three months; palladium gained about 9%, versus platinum's 5%.

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