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%.

 

The reason? Despite its industrial applications, platinum often behaves like other precious metals, such as gold and silver, due to its use in jewelry and its effectiveness as an inflationary hedge. Palladium, on the other hand, has a range of niche, nonautomobile industrial applications (in the electronics and chemicals industry, for example), and therefore tends to mimic base metals like copper.

"Platinum is a hot metal directly hit by issues such as the fate of General Motors, while palladium is behaving like a base metal and keeping a distance from auto problems," Yukuji Sonoda, a precious metals analyst at Daiichi Commodities, told Reuters.

But something to keep in mind: Should electric cars ever take off, catalytic converters would become obsolete - and as a result, platinum and palladium could take a major hit.

 

The Fortunes Of Stillwater Mining

GM's bankruptcy and a shifting platinum/palladium demand picture could have major consequences for the U.S. sole platinum group metals miner, Stillwater Mining (NYSE: SWC).

According to their Q1 2009 report, 70% of SWC's platinum production and 100% of its palladium goes to two major automaker clients: Ford - and you guessed it - General Motors.

In a press release last month, Stillwater CEO Frank McAllister said:

"The overall consequences of a General Motors bankruptcy are difficult to predict. The contractual floor prices in our automotive contracts and the collectability of our accounts receivable could be placed in jeopardy. We are monitoring these risks closely."

Still, SWC has had ample time to prepare for and dilute the impact of a GM bankruptcy. Stillwater CFO Greg Wing recently told Mineweb, "Because independent terminal markets exist for both platinum and palladium, should the GM contract be dissolved we believe we will still be able to sell the metal we produce."

In fact, the Ford deal is apparently more valuable than the GM contract, revealed Steve Gentry, a spokesman for the United Steelworkers Local 11-0001 miners union.

"I haven't heard anything that would concern me, at least up until this point. Their major contract is not with GM; it's with Ford, and Ford hasn't gotten into all this," he said.

So far, SWC has experienced an extended rally since March, boosted like many platinum stocks by investors seeking inflationary hedges. Shares are up 48.5% to date, despite a first-quarter loss of $11.6 million.

 

Accessing Platinum And Palladium

Apart from miners, U.S. investors looking to invest in platinum and palladium have a few options available to them. Although there's still no launch just yet of a platinum or palladium bullion-backed ETF akin to the SPDR Gold Trust ETF (NYSE: GLD), investors wanting physical exposure to the metals can purchase NYMEX futures contracts for both. (ETF Securities does run bullion-backed exchange-traded products for both metals in London.)

For nonphysical exposure, investors can hit up ETNs like the E-TRACS UBS Long Platinum ETN (NYSE Arca: PTM), the E-TRACS UBS Short Platinum ETN (NYSE Arca: PTD) and the iPath Dow Jones AIG Platinum Total Return Sub-Index ETN (NYSE Arca: PGM).

 

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