What a New ETF Basket Means for Platinum and Palladium Prices

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[youtube]http://www.youtube.com/watch?v=SKL254Y_jtc[/youtube]

Arguably the best commercial that aired on Super Bowl Sunday featured the rapper Eminem, the city of Detroit and an ostensibly reinvigorated Chrysler Corp. hawking the new Chrysler 200. To say nothing of the quality of the videography and editing which were excellent the ad was more an explicit endorsement for Detroit itself, showing how the city and the Big Three (or Big Two plus Chrysler, as the case may be) are inextricably linked.  But it got me thinking about the still-ailing Chrysler (relative to Ford and GM) and how the US auto companies relate to the current platinum and palladium market.

OK, this may be a stretch, you say, but platinum and palladium are on our radar again after hearing ETF Securities outline their “new (at least to the US market) basket of white metals last week. Consisting of platinum, palladium and silver shares backed by the physical metals, WITE (as the basket is listed on the NYSE ARCA) is taking just a bit more metal out of the supply stream for the investment world.

Is industrial metal buying and base metal investment converging? Not in a literal sense, no. But we have been reporting on how they are becoming increasingly linked, as steady price rises in platinum and palladium due mostly to the auto industry’s use of the metals in catalytic converters and the like continue to push analysts and journalists to speculate on whether they make solid investment tools.

Surely, ETF Securities is one of the firms pushing investment in the white metals as a hedging tool in a volatile economic environment. They offer individual ETFs for palladium and platinum, but contend that placing these metals in a basket takes commissions and spreads out of the picture (by offering an expense ratio of 60 basis points) and simply allows for a diversified portfolio. Supply-wise, ETFS currently holds 13.3 tons of platinum and 19.6 tons of palladium; according to the USGS, with 2010 global production of platinum estimated at about 183,000 kg and palladium at 197,000 kg (both roughly 3 percent increases from 2009), it is tough to make the argument that the ETF is sucking vast amounts of physical metal out of the global market.

But generally investor interest follows industrial demand, and that clearly moves the market. Based on an ETFS graph (that we cannot reprint here), China’s PMI has correlated rather tightly with platinum and palladium prices from 2006 to 2010. Even though China is set to cut certain auto subsidies in 2011, gas prices remain high and more registration rules will take effect, Tim Harvey of ETFS’ marketing arm, said in a conference call the country’s auto manufacturers are increasingly turning to gas engines rather than diesel, which is good for PGM demand.

“China is the buzzword on everybody’s lips, Harvey said.

According to data from the China Association of Auto Manufacturers, China produced 18,264,700 vehicles overall, a 32.44 percent increase from 2009. In December 2010, production was up more than 6 percent from the month before, and 22.3 percent higher than December 2009. India is the other burgeoning Asian auto market, with demand rising. The US market looked good in 2010 as well; with Ward’s data showing a 31 percent increase in total light vehicle sales, from 869,828 in November to 1,140,165 in December.

Which brings us back to the Big (Formerly-Known-As) Three. GM has made moves to secure its palladium supply by making a deal with just about the only US producer of the metal, Stillwater Mining Co., based in Montana. The AP reported just before Christmas that GM signed a new contract with the miner to supply the automaker’s palladium for three years. (Ford Motor Co. also has a contract with Stillwater that is set to expire and needs to be renegotiated). Both GM and Ford had a much better 2010 than their domestic competitor: although Chrysler “sees profit ahead, it still reported a $652 million net loss last year. (Better than the $3.8 billion loss in 2009, though.) However, Chrysler’s heads are looking to increase sales by 45 percent this year, confirming a bullish outlook on the domestic and global auto market.

Ultimately, many analysts and investors are bullishly maintaining that the emerging market auto demand should keep platinum and palladium prices up through 2011. Societe General, for example, upped its 2011 palladium price forecast to $840 per ounce (from $755 an ounce), citing strong fundamentals.

In a previous MetalMiner interview, Will Rhind, ETFS’ head of US operations, just about summed it up:

“Global economic growth does seem to be picking up, he said, “and that may have more of a positive effect on the pro-cyclical metals such as silver, platinum, palladium and copper to name a few.

–Taras Berezowsky

Those interested in the silver market can attend a free conference Phoenix Investment Conference & Silver Summit on February 18-19, 2011.

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