Why Buy Platinum and Palladium – part 1

platinum-mining

In a recent article we discussed the case for buying platinum today. In the coming two articles we’ll look deeper into this topic and also cover why palladium offers an almost equally attractive investment opportunity in today’s market. Read on below for why buy platinum and palladium today.

Platinum is both a precious metal and an industrial metal. So is palladium, albeit to a lesser degree a precious metal. In those ways platinum and palladium both are similar to silver. But there is a difference. Silver is more of a precious metal, whereas the main driver for platinum and palladium are industrial use.

Demand for platinum and palladium comes from a multitude of sources such as laboratory equipment, electrical contacts and electrodes, platinum resistance thermometers, dentistry equipment and jewelry. The largest demand source is the auto industry though, as platinum and palladium both are used in autocatalysts. Around 55% of platinum production and the lion share of palladium production were used in catalytic systems in 2012.

Since the auto industry plays such an important role in the demand for these metals one has to understand the drivers for the auto industry, to make an educated guess on the future demand factors and price drivers. The auto industry is sensitive to the general economic climate. If growth is positive then demand tends to follow and vice versa.

It’s easy to doubt the demand side as the economic climate and growth seems very fragile in many countries. To a large extent the growth is driven by money printing and artificially low interest rates in the world’s major economies. This ensures that there is a, if not growing, then at least stable demand for platinum and palladium for the time being. As we’ve discussed before money printing is not a sustainable growth factor though, so even though demand is important it’s not the sole answer to the positive drivers for these metals.

The real interesting factor is the supply side. South Africa is the world’s most important producer of platinum as it stands for 75% of annual production and 95% of known reserves – so what happens there can have a significant impact on supply. Between 2011 and 2012 global platinum production went from a surplus to a significant production deficit. The deficit in 2012 totaled 375,000 ounces.

So what are the main reasons for why maintaining current supply levels may become problematic going forward? Let’s look into the main factors for both platinum and palladium. We’ll start off with platinum.

There are ongoing issues with strikes and power outages in South Africa. Currently, there is major disagreement on worker compensation between unions and employers that are causing interruptions to production. Amplats, which is the world’s largest platinum miner is threatening to cut thousands of jobs and not follow through on establishing at least two new mines. Power outages continue to affect operations and have already forced the closure of some sites.  The end result of the unstable production conditions is reduced supply, and this is the prime reason for why platinum prices most likely will go up.

Recycling has been an important supply factor but with declining metals prices it has come down by an estimated 11% in 2012.

There is a continuous growth in demand for emission systems. Even though we’ve seen a decrease in demand from Europe and Japan, India together with China are ensuring an increase for emission systems and diesel emission control systems.  Auto-sales are furthermore rising in China and the U.S.

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