Every week or two I receive a “random inbound email from someone who happens to be passing through Chicago and would like to set up a meeting. Since many of these emails involve software or services outside our core business, I tend to ignore most of them. But when I had the opportunity to meet up with Will Rhind of ETF Securities, I knew I’d learn something. For those of you not familiar with ETF Securities, they offered the first physically backed precious metal ETFs including gold, silver, platinum and palladium for the US market. Yawn some of you are saying “Lisa, we don’t buy precious metals who cares. Well, that statement may apply to most of you but we’d argue gaining an understanding of how these commodity ETFs work and how they can (or can’t as the case may be) impact industrial metals markets applies to any sourcing organization and in some cases, to any company for that matter. Here is why¦.

First, Will mentioned that many corporations have parked their cash so to speak in commodity ETF’s as a means of hedging global financial risk. Though I argued companies probably have less fear of that today then say 12 months ago, I’m sure Will is correct in that Treasury departments in major corporations have begun to reconsider their own risk mitigation strategies. That may include diversification for which commodity ETF’s offers a means of doing just that.

Second, for better or worse, the rise of physically backed ETF’s has impacted prices. Though Will quickly pointed out that many folks ignore the fact that a bigger and faster growing bar and coin market exists, nevertheless, ETF Securities’ four US precious metals products have received inflows of over $1.3b. By investing in the underlying metals (the metals are stored in Switzerland) price direction has come from the “long positions taken by investors. We recently covered the rising palladium market. But Will also suggested that prices for palladium may also be high because the Russians don’t have as much stock as some previously suspected (logic being that if they did have stocks, now would be a good time to offload them given rising price levels). So to some extent, the increase in palladium prices may very well indicate the supply situation looks less rosy than previously thought.

But the points I found most interesting in my discussion with Will involved the differences in perception between the US and European markets for these products. Only in the US has Will encountered a number of conspiracy theories typically centered around the notion that the gold (and other metals) held by these funds either a) doesn’t exist or b) isn’t authentic. No doubt this stereotype stems from the Great Depression when Franklin Roosevelt issued Executive Order 6102 essentially ordering US citizens to hand over their gold to the Federal Reserve for $20.67/oz (failure to do so would result in a fine, up to ten years in prison or both) When I mentioned our coverage of tungsten filled gold bars, Will laughed saying, “So you are the source of all the phone calls we receive on that subject! But ETFs remain subject to US bank regulation and could not operate in the US if the underlying commodities didn’t correspond to the financial product offered.

For now, the base metal ETFs can be classified as “synthetic in other words, they either mirror what happens on the futures exchanges or comprise a mix of producers whose stocks comprise the ETF basket. These do not impact prices.

What plans does ETF Securities have for the future? Will mentioned several times the company has over 180 commodity products currently offered abroad and they seek to create that one-stop-shop for the US market. What does this tell us about metal ETF’s? We take it as a signal that these financial products both synethetic and otherwise remain in a growth cycle.

–Lisa Reisman

Is Palladium over valued and due for a fall or is it the new darling of the investment community and set to rise further in the coming months? Yes or no to both depending on who you read.

Back in January we wrote our Price Perspectives for platinum, palladium and rhodium in which we analyzed the supply and demand markets for these metals and looked at the key factors likely to drive prices in the year ahead. That analysis has proved to be remarkably prescient and in the case of palladium price movements have been so significant we thought it would be interesting to dive a little deeper into just two of the key drivers to see what is happening three months on.

Certainly Palladium’s rise has been dramatic this first quarter of 2010, from starting the year at about $420/ounce the London Fix has risen to over $540/ounce this week, a near 30% increase. So what has driven the increase and what is in store for palladium prices going forward? Well to judge the future it helps to understand the past. There have been a number of factors in palladium’s favor driving up the price. First, the fundamentals have been sound, due to its much lower cost than platinum the metal has been partially substituted for platinum in the mix of PGM’s used in automotive catalytic converters, particularly in diesel engines. In a recent note to investors, Standard Bank advised global auto sales are still on the rise, and China remains in the lead.  Why is catalyst demand so important, the following graph from the Market Oracle illustrates the dominant role the automotive market has on palladium demand, with one exception ETF demand which we will come on to shortly.

According to Standard Bank, Japan’s auto sales for March have risen on a m/m and y/y basis. US auto sales in March were up too. China’s auto sales for March have posted a 56% y/y increase. Base effects make sales growth look spectacular. But even in absolute terms, auto sales in the four large markets (Japan, Europe, US and China) are rising fast; the recovery that started in June 2009 continues. Japan sold 674k vehicles in March, this is 24% more than February 2009, and a 47% rise month on month. The US recorded total auto sales at 1.06m units in March, this is 24% more than March 2009, and a 36% month on month increase. China sold 1.7m units in February, up 56% y/y and 43% m/m. Clearly physical demand for palladium is rising.

At the same time that demand is increasing supply looks like it could potentially be constrained. 80% of the world’s supply comes from just two sources, energy constrained South Africa and potentially unreliable Russia. Russia has repeatedly shown it is willing to use supply of its natural resources as a political weapon without concern for the consequences down the supply chain as with a dispute over natural gas with its neighbor the Ukraine last year illustrates much of south eastern Europe suffered a cut off in gas supplies and prices spiked for the rest of the continent. Russia has been a source of supply from both new mining and its national stockpiles. According to this site these Russian palladium stockpiles were built in times of excess supply, during the seventies and eighties, and used in order to balance the market. During the nineties when Norilsk Nickel production could not meet growing palladium demand from the auto-catalyst sector, the gap was filled by state stockpiles from Gokhran, the Russian precious metals agency (which is part of the Ministry of Finance), and by the Russian Central Bank sales. The spot price for palladium spiked to over $550/ounce this week when Anglo Platinum said that the global market for the metal may be in deficit for much of the next decade due to the combination of increased industrial demand and the depletion of those Russian stockpiles.

In a recent article, the Telegraph newspaper reported investment demand in 2009 for physical gold surpassed jewelry buying for the first time since gold hit its inflation-adjusted high in 1980. Demand almost doubled over the course of the year, with high prices and the global economic downturn causing demand for gold jewelry to slide 20%, quoting metals consultancy GFMS. On the back of a strong interest in gold all the precious metals are being bought aggressively for their own long term value and as a hedge against dollar weakness and inflation. The most popular form of investment are Electronic Traded Funds such as the new ETF Securities physically backed palladium ETF launched earlier this year. The Telegraph article quotes RBS in saying the inflow of money into palladium ETFs worldwide was equivalent to 28% of estimated palladium consumption in the first quarter of the year. The launch of the new US fund has resulted in the amount of palladium held as an investment to rise 48% over the quarter.

So is the rise in the palladium price another spike like we saw back in the early part of the last decade, to be followed by a crash back to $150/ounce? Almost certainly not. The previous rise was much sharper and a sudden switch to silver alloys in cell-phone electronics pulled the rug from prices on that occasion. The rise this time appears supported by more factors but a correction is not unrealistic. Although palladium is back around its long term 3:1 ratio with platinum, the rise this year has been largely due to heavy physically backed ETF inflows. Once this settles down to growth levels seen in other PGM’s, so will demand. The long term fundamentals for palladium look sound but we would expect the price curve to flatten from here this year. Substantial further increases will begin to impact long term physical demand growth.

–Stuart Burns

Listen in to MetalMiner’s Lisa Reisman who explains why the historical variables examined to price forecast platinum, palladium and to some extent rhodium are no longer valid today.

Buyers of platinum, palladium and rhodium have a particularly complicated job of tracking and projecting price movements due to the diverse range of variables that impact the cost of each of these metals, particularly for platinum and palladium. With South Africa home to 78% of the world’s supply of platinum and 86% of the world’s supply of rhodium (it “only controls 35% of the world’s supply of palladium), issue such as mine safety for example can have an enormous impact on the market. The Wall Street Journal recently reported the production declines of South Africa’s largest mining firms from suspended operations due to safety concerns. According to the article, AngloGold Ashanti Ltd had a 14% production decline from 2008 to 2007 and Lonmin PLC, had a production decline of 5% in 2009. In addition, Impala Platinum Holdings, the world’s second largest producer of platinum according to the WSJ article lost 83,000 of platinum production due to a rock fall that killed nine workers.

The following chart shows the mine safety trends for the South African mining firms:

And though 2009 appears on par with 2008 levels, miners have concerns that the rules for work stoppages appear vague and unclear and have urged the government to generate new more explicit guidelines governing work stoppages. But safety concerns represent only one of about eight variables that impact precious metal pricing on the “supply side. Our Platinum, Palladium and Rhodium Price Predictions 2010 report provides an in-depth look at the 15 or so variables that we believe impact platinum, palladium and rhodium prices.

Meanwhile, prices for platinum and palladium have increased since the beginning of the year though the 30-day charts look a bit different between the two metals:

Much of the rise in platinum prices this year however, does not relate to mine safety issues in particular but rather total gross dollar inflows into ETF’s and specifically, dollar inflows into the newest fund set up in New York. The funds only hold 1392 tons of platinum or less than eight weeks of global demand, according to Mineweb but the dollar flows of $400m into all funds and $250m into the newest NY fund have driven up prices.

Buying organizations wishing to better understand all of the factors impacting the future price of these metals can find more information here in our price forecasts section of the site.

–Lisa Reisman

Various noted market commentators were interviewed at the 16th annual Mining Indaba in Cape Town this week and the sentiment appears to be largely bullish. Playing safe most predictions were pitched at the long term such as Kevin Norrish, Managing Director of commodities research at Barclays Capital who said he could see prices rising steadily in 2010 and through into 2011 due to demand from China and the “financialization of the metals sector. By which we take him to mean the flows of investment money into metals commodities. “China’s commodity demand has reached critical mass, with global demand for copper from China rising to 35% last year from 15% in 2001. China is the most important factor in copper and commodity production, he said in a local paper, “We expect price increases to hit fresh highs by 2012, driven especially by insatiable demand from China as well as an expected rise in demand from members of the OECD. Norrish went on to say he expected the copper market to be in deficit in the next couple of years and prices to reach US$8,000 per metric ton.

Iron ore was also singled out for attention, this time by Magnus Ericsson of Raw Metals Group who observed China’s steel demand would drive iron ore imports up by 10% this year and the new benchmark would be 10-15% higher than last year we would pitch it higher than that but we will see.

Guy Elliott, CFO of Rio Tinto was particularly bullish for the long term saying to Reuters economic growth in China would double global demand for aluminum, iron ore and copper over the next 15 years. Rio is said to be increasing iron ore production by 10% in 2010 over 2009 but interestingly still have some of their aluminum smelters running at below capacity.

Last, on precious metals Tom Kendal, a precious metals strategist at Mitsubishi said platinum would reach $1,700/ounce in H2 2010 on the back of a global recovery in vehicle manufacturing and increasing emissions regulations.

–Stuart Burns

Platinum, Further to Go?

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Automotive, Precious Metals

Gold, the darling of 2009 appears to be the ugly duckling of 2010 as investors’ focus switches to platinum and palladium. In spite of incessant broker promotion the gold price has stagnated over the last month after reaching a peak of nearly $1220/oz in December before becoming range bound either side of $1120/oz.

Gold Price

Investor interest has shifted to platinum and palladium as automotive manufacturing has finally come out of the parking lot in North America and Europe. Sales are predicted to pick up some 5-7% according to supplier to the industry Alcoa in their 4th quarter earnings report but some boosters are predicting an even stronger rebound. Automotive will expand output by 20% this year, Evan Smith, who helps manage $2 billion at U.S. Global Investors is quoted as saying in this blog.

One of gold’s principal supporters over the last two years have been Electronic Traded Funds, but this year ETF Securities launched their metal backed platinum and palladium funds and saw a surge in demand lifting their holdings to a record 594,465 ounces. Standard Bank called out the upside for platinum late last year in their Commodities Daily reports, largely on the back of the stronger fundamentals of restricted South African supply and returning automotive demand.

So far the price has risen strongly this month only to be knocked back by President Obama’s comments about the banks, few seem to think that set back will be enough to slow platinum’s rise.Platinum Chart

There seems to be no end to some supporters enthusiasm Joerg Ceh, head of commodity trading at Landesbank Baden- Wuerttemberg in Stuttgart, Germany’s biggest state-owned lender is reported to have said prices could reach $2,400/ounce one wonders just what kind of a long position he is sitting on.

–Stuart Burns

There has been an awful lot of coverage, both here and in more famous columns (you notice I didn’t say better just more famous) about commodity price increases. You can’t open a newspaper or turn on the TV without seeing yet another record high price for precious metals, or agricultural products, or steel. But we have not reported so regularly on the effect these price increases are having so it was interesting to come across various sources discussing the impact on the US automotive industry.

The struggling big three automakers are being hit by about $350 raw material cost increases per vehicle compared to the average for 2007 and $421 per vehicle compared to February of last year according to Lehman Brothers. Read more

You’d think that with the current high price of metals, an impoverished country like Zimbabwe would be doing everything in its power to court foreign investors and others to invest and grow the economy. But you would be wrong.

In an unbelievable move last week, 84 year old President Robert Mugabe essentially nationalized all public companies by enacting a law which requires such companies to give up a 51% majority stake to indigeneous Zimbabweans according to this Mineweb article. The metals angle here? According to the article, Zimbabwe is second only to South Africa in world reserves of platinum and chrome.

The insanity of this law is proven out by taking a look at Zimbabwe’s history under the er ugh um leadership of Robert Mugabe. Under Mr. Mugabe,  Zimbabwe has:

  1. Passed a land reform bill in 2000 effectively forcing whites to give up all of their farmland to less experienced indigenous  people which resulted in shortages of basic commodities and a crippled economy (66% of the people are employed by farms); the move also made Zimbabwe, a net exporter of foods a net importer
  2. In 2007 he put in place price controls resulting in panic buying and empty store shelves
  3. From just a numbers perspective, GDP is now at -6%. Industrial production growth (including mining) was at .5% (you can see where Mugabe’s new law will take the numbers), unemployment is 80%, life expectancy is 39.5 years, and 24.6% of the population has HIV/AIDS

The list of Mugabe Ëœaccomplishments’ goes on and on ” an unsustainable fiscal deficit, the philosophy of printing money to pay for the deficit, an overvalued exchange rate, and GDP per capita of $500 per year.

The new law, which will affect mining giant Rio Tinto, Impala Platinum Holdings Ltd and Aquarius Platinum Ltd will likely speed up the country’s decline ¦further increasing its inflation rate, already the world’s highest at 100,000% (no that isn’t a typo).

What a shame with world record pricing for gold, coal, platinum, chromium and iron ore and historically high pricing for nickel, copper and tin Mugabe couldn’t leave well enough alone. We’ll continue to see high prices for platinum and chrome as Zimbabwean exports fall off the map. But sadder still is the fate of the 12 million citizens subject to Mugabe’s hair brained policies.

–Lisa Reisman

There’s an age-old adage that one thing is constant ” and it’s change. No, I’m not leading into politics and the 2008 presidential election in the States. Rather, let’s think beyond Super Tuesday and look to the metals industry. With all of the  metals industry’s longstanding practices, are there really ways for metals and metals-related processes and purchases to become eco-friendly? Rest easy, because the answer is a resounding yes. In fact, the metals industry is the vibrant host to several new ecologically aware innovations, and they might be the key to sustainable growth and development. Read more

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