PGM Markets Still Tight; Prices Likely To Rebound From Profit-Taking Losses
Frankfurt (Sept 10) Platinum group metals have stumbled so far this month but are likely to regain their footing since the supply/demand backdrop remains tight, say analysts and traders.
They blame a recent pullback largely on investor profit-taking, particularly after futures positioning became “overextended,” with the metals also sliding with gold due to recent U.S. dollar strength.
On Sept. 2, December palladium hit a peak of $913 an ounce on the New York Mercantile Exchange, which at the time was a year-to-date gain for the contract of 26%. The cash market hit the highest price since 2001, and Commerzbank called palladium the third-best performing commodity this year of those it tracks, trailing only Arabica coffee and nickel. Over the last week, however, December palladium fell back to a one-month low of $849.65 as of Wednesday morning.
October platinum hit its high for the year back in July at $1,523.80 and has softened since, bottoming at $1,380.60 so far Wednesday. This metal is now back where it was in early February, when a five-month strike in the South African mining sector was only two weeks old.
“Especially in the case of palladium, it was due to profit-taking,” said Daniel Briesemann, commodity analyst with Commerzbank.
Jonathan Butler, precious metals strategist with Mitsubishi Corp., said the pullback in palladium was not surprising after the sharp run-up this year, as well as the investment and speculative interest.
Holdings in palladium-backed exchange-traded funds peaked at just above 3 million ounces in late August, but have since fallen to 2.88 million, he said. Profit-taking tended to occur in established ETFs, with none in two new ones launched in South Africa in March, which hold more than 950,000 ounces, he added.
“Also, positioning on Nymex has been a little bit overextended as of late and … many investors would have been in a position to take a profit,” he said. As of the end of August, money managers in the Commodity Futures Trading Commission’s “disaggregated” positioning report were net long in palladium by a historically high 23,226 contracts for futures and options combined.
Butler said “nothing has changed” with regard to palladium’s fundamentals. “It’s more of a technical move and a move on the back of investor positioning,” he said.
HSBC, citing Bloomberg data, said holdings in the top seven platinum ETFs fell to 2.74 million ounces from 2.85 million on July 23.
While platinum has been higher for most of 2014, the metal nevertheless underperformed against palladium. Butler said the platinum/palladium ratio – which measures how many ounces of palladium it takes to buy an ounce of platinum – recently fell to a low of 1.56 that was the smallest since 2002.
The platinum market may have been affected more by U.S. dollar moves and an attraction for strong equities, Butler said. He also cited less investor interest and fact that “the platinum story has already been played out,” with a strike against the three major South African producers starting in late January and ending in late June. Even during the walkout, platinum did not rise as sharply as some expected since producers had built up inventories ahead of the labor action, Butler said.
Butler and a North American trader also linked much of the pullback in the PGMs so far this month to a stronger U.S. dollar. This can hurt all commodities by making them more expensive in other currencies. The cash U.S. dollar index Tuesday hit a high of 84.519 that was its most muscular level since July 2013. In particular, the foreign-exchange market is factoring in an expectation for U.S. interest rates to eventually rise as the economic recovery continues, while the European Central Bank last week undertook more monetary easing, including the announcement of purchases of asset-backed securities.
“Dollar strength has taken a toll on the precious metals complex across the board, with gold dragging these things (PGMs) down,” the trader said.
Supply Deficits Expected For 2014
Observers still describe supply/demand fundamentals as favorable for PGMs, especially palladium. Commerzbank said it expects to see $1,450 platinum and $900 palladium again by year-end.
“Based on the fundamentals alone – strong auto demand, supply issues continuing in Russia and South Africa – we’re still fairly bullish on the metals,” said the North American PGM trader. Nevertheless, he added, chart resistance seems to have emerged around $900 for palladium, with some traders looking to book profits here.
Further, Briesemann and a trader said, there is potential for more Western sanctions against Russia over the Ukraine crisis. Russia is the world’s No. 1 palladium producer and No. 2 platinum producer. The bank cited news reports suggesting that Russia may ban car imports from Western Europe and the U.S. if they continue imposing economic sanctions. Also, Commerzbank said, it is conceivable Russia could reduce palladium shipments, making the market even tighter.
“In the case of platinum, the situation in South Africa still has not cooled entirely,” Briesemann said. Labor tensions could arise again if producers follow through with plans to sell or shutter some mines and lay off workers. The bank pointed out that Anglo American Platinum, the world’s largest producer, already announced that it will abandon some mines and joint ventures after first-half profits collapsed, and Lonmin is reportedly also considering job cuts.