I actually just read this on RI last week...follow link for charts
http://www.resourceinvestor.com/pebble.asp?relid=40500
Palladium Is Likely to Break the Hearts of Investors
By Jack Lifton
14 Feb 2008 at 01:12 PM GMT-05:00
DETROIT (ResourceInvestor.com) -- In honour of St. Valentine’s Day, I want to tell my readers not to get their hearts set on investing in palladium; I think that palladium seems to have recently flat lined. I detect the odour of wasted money emanating from any investments in it other than very short term plays, which are best left to those able to absorb large losses without losing their ability to eat and sleep in a warm building.
I noticed a posting in Resource Investor’s PitPundit Blog a few days ago that was a clear warning sign to those who might seek to link platinum’s current spree with palladium. The Nymex has raised the margin requirements for those who wish to trade in palladium futures both here and in Asia. I asked myself, after I read that report, why has the Nymex acted as if it is getting ready for a flood of speculation in the least valuable of the platinum group metals?
I don’t want to be mysterious, for even a second, so I will tell you that the NYMEX is worried that speculators with a (not well) hidden agenda, such as hedge funds, large German banking institutions and major producers of palladium, want to try to piggyback on current platinum fever to run up the price of palladium and unload positions in physical metal, which some of them have held for nearly a decade and the total of which equals several years, yes, I said years, of demand at current (noticeably declining) levels.
I actually think that we are seeing a utility based only paradigm developing for trading the coinage metals (historically these are gold, silver and copper, and there has been an attempt to add platinum and even a tiny amount of palladium to this category), and it, the new paradigm, in the commodity usage blow out that has characterized the 21st century; is one that the producers and traders do not like.
Although the platinum group metals (platinum, palladium, rhodium, ruthenium, iridium, osmium) cartel of trading companies and producers would like you to think differently, it is a fact that the production of platinum and palladium are not linked; the primary producers of those two metals produce one or the other in major volume but not both. If the production of platinum were to stop so then would the production of rhodium, but palladium production would be unaffected. Likewise, but not symmetrically so, the stopping of palladium production would not effect the ability of primary platinum miners to continue in production of platinum and rhodium. A slowdown in nickel production in Canada and or Russia would reduce palladium production in direct proportion whereas a slowdown in nickel production in the Republic of South Africa would only affect part of the production of platinum and rhodium.
Another illusion that the cartel likes to promote is that there is a linkage in the usage of platinum and palladium by the OEM automotive industry.
Global OEM automotive industry demand and its sources of supply are proprietary, whereas that portion of PGMs supply coming from newly mined metal is mostly public. Recycling and byproduct production are mostly proprietary. So the Johnson-Matthey yearly “Platinum Book” is mostly educated guesswork on OEM automotive industry demand, even though that demand takes up most of the world’s rhodium and platinum production but not anywhere near as significant a part of new palladium production.
The U.S. Geological Survey has just published its Platinum-Group Metals Minerals Commodity Summary (PGM MCS) for January 2008, listing its data for 2003 through 2007 inclusively. The USGS is very conservative in its projections or predictions; neither of these are not the point of their data publishing agenda. I want to quote for you the paragraph in the USGS, January, 2008, PGM MCS, which should be of interest to investors in palladium:
“Substitutes: Some motor vehicle manufacturers have substituted palladium for the more expensive platinum in catalytic converters. Until recently only platinum could be used in diesel catalytic converters; however new technologies allow palladium to be used. For most other end uses, PGMs can be substituted for other PGMs, with some losses in efficiency. In addition, electronic parts manufacturers are reducing the average palladium content of the conductive pastes used to form the electrodes of multilayer ceramic capacitors by substituting base metals or silver-palladium pastes that contain significantly less palladium.”
Investors need to be aware that some reductions in the uses of palladium, which the USGS writer mentions as trends are, in fact, already accomplished.
For example, when palladium became more expensive than platinum in 2001, its usage in catalytic converters was reduced substantially and both this “thrifting” and new technology have allowed OEM users of catalytic converters to dramatically reduce their needs for PGMs since that time. This has kept any growth in palladium usage, for example, either very low or negative. As far as the electronics industry goes, thrifting has eliminated, since 2000, some 1 million ounces of demand for palladium by that industry. It is no secret that the American sole producer of palladium was only able to stay in business during that period because of a mistake by the Ford Motor Company that forced Ford to take or pay palladium from that company at above market prices for several years; Ford took a $1 billion write-down in 2004-2005 to cover just that one error in judgment.
When that contract finally ran out, America’s sole producer of palladium was forced to sell itself to the world’s largest palladium producer, Norilsk, the Russian nickel giant. The American company was paid in part with nearly a million ounces of palladium delivered from Norilsk’s mammoth inventory of the metal. This enabled the American company to meet its contractual obligations without having to produce more palladium at a cost above the global market price.
The vaults of companies such as Norilsk, and some banks, both for their own account and for the accounts of funds that bought the metal as pure speculation in the run up of the early 2000s, are brim full of palladium. But hasn’t palladium’s price doubled since 2003? Why don’t the holders of physical metal unload their positions?
Has the price doubled?
Look at the exchange rate of the dollar between 1 January 2003 and the present:
Charts not included
Note that while the price in dollars has indeed doubled, the price in euros has gone up by only half as much. Had the purchasing department of a company such as the Ford Motor Company bought euros in 2003 and then used them to buy palladium during this period, they would have saved several hundred million dollars. Although some of the more sophisticated buyers in the OEM automotive industry have been hedging some metals, such as palladium, all along none of them hedged euros and then used them to buy palladium hedges. To be fair it is rumoured that Toyota did just that, and saved a fortune, but I do not know if this is true.
Note from the last graph above that beginning in 2006 the price of palladium in euros flat lined while it was climbing in U.S. dollars. Although during 2007 the euro price of palladium climbed a little it was no where near the climb of that metal in U.S. dollars. Clearly the price of palladium is mirroring the exchange rate between the euro (and the yen and the Renimbi) and the U.S. Dollar. I think this means that the fundamentals of palladium are reflecting a major overhang of physical metal in inventories not of end-users but of producers and large investors.
The Nymex seems to agree with me. Its action in raising the margin indicates that it sees a wave of speculation coming and it wants to protect its market makers from insolvency. The Nymex has raised its margin requirement for palladium to a level higher than it thinks palladium may be selling for in the near future so that those who have been building inventories of physical palladium for the last eight years either to maintain the price (producers) or to make a “killing” on another 2001-type speculative push will have to, at current or near term prices, bear the hard currency losses caused by their initial rush to “get into palladium” without an exit strategy.
Perhaps the Nymex is just adjusting to the new (declining) value of the dollar; perhaps margins on the less utilitarian metals will shortly be indexed to one or a basket of hard currencies.
Don’t go near palladium for the time being; you could get burned because it may only be hot due to the friction caused the shovels being used to empty vaults in Montana, Novosibirsk, Zurich, Geneva and some beautiful German Cities.
--------------------
Jeremy Davis
Educational Concerns for Hunger Organization, Inc.
Check out the ECHO mushroom blog page to see our lab, growing facility, and more-www.echotech.org/greta
Edited by Jeremy_Davis (02/22/08 01:33 PM)
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