ETP: Platinum – China jewelry demand, a new engine of growth


We believe  the  palladium  price  has the potential to perform strongly over the next few months on a combination of  price  supportive  supply and  demand fundamentals….

ETF Securities Research

04112013 1Supply side issues in the two main producer countries, Russia and South Africa, coupled with better than expected Chinese growth and early signs of a European recovery are likely to support  the  palladium price  going forward.  Currently  the palladium price is 13% below the high reached on February 2011. We think the decline has been overdone and expect price gains over the next six to twelve months to be underpinned by strong fundamentals.

Strong Deficit Expected
The palladium market  experienced a large  deficit last year and demand is expected to outstrip  supply by at least 850 thousand ounces  in 2013 equivalent to 10% of global supply, according to  a number of industry experts(1)  (Figure 1). With supply  structurally  limited by falling ore grades and  the expected  depletion of Russian government stocks,  the  palladium  price appears to be in a  good  position to benefit from  the recent pick-up in auto sales.  (1)
Demand Side
With over 65% of palladium demand coming from autocatalysts,the  palladium price  is strongly linked to the outlook for vehicle sales in China and the US, the two  biggest auto markets in the world. Combined annual sales in China and the US amounted to over 35 million vehicles  in 2012  and were up 14% in the nine months to September 2013 compared to a year earlier. However, this sharp rise appears not to have been reflected  in  the  palladium price yet  (Figure 2). With China auto sales expected to surpass 20 million(2) this year and US  light  vehicle  sales  forecasted to climb to 15  million(3) , we believe palladium price has upside potential.
Supply Side
Palladium mine supply has been declining by an annual rate of 2% since  2007.  (Figure 3)  Norilsk Nickel,  the biggest producer  of palladium, recently announced a 3% cut in production for 2013.  While  a pick-up in palladium utilisation in catalytic converters since the mid-1990s has  resulted in a  sharp increase in  supply from recycling,  it might not be enough to compensate for dwindling mine supply and the depletion of Russian government stock sales. Decreasing ore grades  in the two biggest producing countries, Russia and South Africa,  are  also  likely to cap any upside  production potential in palladium supply going forward.  
The palladium market is  likely to remain plagued by a structural deficit due to a combination of  increasing demand for autocatalysts  and  declining supply. We believe that  the  palladium price has  strong upside potential. From a  technical point of view,  the palladium price appears to be well supported, after having breached its 50dma and 200dma a few weeks ago  (Figure 4). We identify the next resistance level  in the region of  US$760-780oz. Should this be breached, palladium  is expected  to return  to  trade above US$800oz, targeting the 2011 highs of US$858oz.

(1) Thomson Reuters GFMS expects an 850koz deficit (as of May 2013). Johnson Matthey forecasts the deficit to be in line with 2012 when demand outpaced supply by over 1mn ounces. Norilsk Nickel, palladium’s biggest producer, expects palladium deficit to rise by 25% in 2013 to over 1mn ounces.
(2) Estimates published by China Association of Automobile Manufacturers (CAAM) in January 2013. 
(3) According to industry experts and J.D. Power affiliate LMC Automotive.



Investors have been shrugging off the first shutdown of the US Federal Government in seventeen years, with most asset classes and gold seeing relatively limited reaction. The calm is unlikely to last long in our view. Toward the end of last week there were tentative signs of increasing market impatience with the lack of progress, including continued selling of the US dollar and buying of perceived safe haven currencies such as the Japanese yen and Swiss franc. The cavalier attitude being taken by politicians about fiscal matters is leading to growing doubts about the ability of US politicians to come to a compromise that will avoid a sovereign default. With the debt limit likely to be breached around 17th October (unless extended), markets are likely to remain volatile and short term news driven over the next few weeks. In the meantime, some investors are taking the opportunity to increase positions in beaten down cyclicals. But if progress on debt negotiations maintains the current stalemate much longer, gold is likely to move back into the spotlight.


Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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