Investors need to take a second look at precious metals including platinum and palladium. World events have continued to make investments in a number of commodities lucrative. On March 21, 2014 this invest writer made a recommendation to buy platinum and palladium. At that time platinum was selling for $1436.00 USD (United States Dollars) per troy ounce. Palladium was selling for $772.00 USD per troy ounce.
At the close of business on June 24, 2014 platinum had settled at the price of $1472.00 USD. The gain for the day was $18.00 USD an increase of 1.24%.The low for the day was $1459.00 USD and the peak for the day was $1478.00 USD. The advance in price for platinum from March to June is $36.00 USD
Palladium has also done well in the preceding three months. At the close of business yesterday this precious metal was $831.00 USD. The low for the day was set at $823.00 USD and a high of $838.00 USD. The increase for the day was $6.00 USD a 0.73% advance. The price change for the three month period saw an addition of $59.00 USD to the price of palladium.
There are a number of factors that will propel the price of both of these metals even higher in the months ahead. Although a five month old strike in South Africa supposedly has ended this past week there remain serious concerns about world supplies of both of these precious metals. As expected the news from South Africa had the price of platinum down $0.70 USD or a 0.1% decline at the end of the business day on Monday for the July futures trading contract. The price had dropped to $1456.60 a troy ounce. Yet in 24 hours the price had rebounded.
Palladium for September delivery actually increased in price in spite of the ending of the longest strike in South Africa’s history. The metal had dropped to $810.50 USD but by the end of the day it closed up $0.45 USD a 0.1% increase. The price was set at $822.65 USD a troy ounce.
Platinum prices are near a two year high and palladium prices have hit a thirteen year high. What is going on here? The answer is really quite simple. It is all about world supply and global demand. It is true that the strike has ended. However, it will take months before the mines in South Africa are back to levels of production that existed before the strike. 80% of the world supply of platinum originates from South Africa.
It is important to note that although the strike has ended there are a number of costs that need to be factored in when determining future prices for platinum and palladium. The damage to South Africa’s economy and to the profits of the main mining companies cannot be discounted. The higher wages that miners will receive despite the loss of nearly $1 billion USD in unpaid wages during the strike, will add to higher costs of production in South Africa. This will have an impact on world prices because of the importance of the nation in meeting world demand for platinum and palladium.
The base cost of producing platinum has been increasing about 10% a year. Since world prices for the metals have not kept pace with this increase profit margins for mining companies are shrinking. In fact some analysts have already determined that half of the mining companies in South Africa were already producing platinum at or above the global price for the metal. This was before the agreement to higher wages and better health benefits for miners that was reached days ago. Increases in productivity have remained flat so the industry is in trouble.
Given this situation I could not personally recommend an investment in the industry at this time in the form of stock purchases of any of the major mining companies in South Africa but an investment in the commodity itself is a different case. While investors are unlikely to pour new money into a mining sector that has been a terrible investment from at least 2002 onward they might consider an investment in the metal produced. With production costs above world prices in many cases one can expect lower stocks becoming available which will in turn put an upward pressure on prices. In 2013, South Africa alone produced 4.1 million ounces of platinum and 2.4 million ounces of palladium.
The main industrial use for platinum will remain in manufacturing auto catalysts found in diesel vehicles.(37% of the total demand). These type of vehicles are most popular in Europe where demand for new cars and trucks will not increase dramatically because of slower rates of economic growth. So although world demand for platinum will continue to increase and global supplies are stagnating, a more impressive case for price movement can be made for palladium.
More so than platinum the real deficit in supply at the moment is palladium. The strike in South Africa only intensified a situation of tight supplies and rising world demand. This should allow palladium to be a better investment than platinum in the long run. Palladium is mostly produced in two countries. It is also more rare than platinum. However, it still sells for 60% of the price for platinum.
Nearly 87% of the global supply of palladium comes from South Africa (37%) and Russia (50%). The remaining producers with less than 5% of the market each are North America and the country of Zimbabwe. It should be noted that the higher production and extraction costs are not limited to South Africa. Future supplies of palladium are going to be harder to find and to actually mine.
An investor must also consider that the strike in South Africa resulted in the loss of at least 5,000 ounces of production daily for 5 months. This will not be easily made up now that mining is resuming.
Another issue that will have an effect on world prices is the increasing political isolation of Russia. This may well further impact world trade and therefore economic conditions inside the country itself. Any further military moves by Russia in Ukraine and possibly elsewhere will undoubtedly lead to further sanctions and economic penalties imposed by the West.
Palladium has several uses. One is industrial the others include jewelry, electronics, dental and finally investment purposes in the form of coins and bars. The last category has been assisted with the advent of Exchange Traded Funds (ETFs) which will hold the commodity in this case palladium, with the selling of shares to individual and institutional investors.
The largest need for palladium is for catalytic converters in automobiles (70% of world supplies). World demand for cars is increasing especially in India and China. In addition, China has announced that in order to combat air pollution the government intends to rid the country of millions of cars that do not meet current Chinese emission standards this year. This will dramatically increase the need for palladium in the production of new cars.
Another important aspect of palladium is in the extraction process. In the majority of mining operations for the metal it only makes up about 10% in the primary ore that is extracted. In Russia for example,at the huge Norilsk production complex the mining of palladium has leveled off because the majority of the refined ore actually ends up being copper and nickel. This adds to the problem of sufficient supplies of palladium. Unless world prices for nickel and copper increase dramatically it would not pay to attempt to increase the supply of palladium. Higher global prices for palladium will not necessarily help to increase world stocks of the metal.
Higher prices for palladium would encourage the recycling of the metal but there is only so much available in this secondary market. It cannot indefinitely make up for the lack of primary supply.
Demand for palladium will exceed supply by over 1 million ounces this year double the rate for last year.
The total global supply of palladium has been declining over the last few years. In 2011 the supply was estimated to be 7,360,000 troy ounces. It dropped to 6,530,000 troy ounces in 2012 and 6,430,000 troy ounces for 2013. With a loss of South African production for 5 months 2014 production levels will even be lower.
The total world supply for platinum has also been stagnating or declining. World supplies for platinum were estimated at 6,485,000 troy ounces in 2011, and only 5,650,000 troy ounces. A slight increase to 5,740,000 troy ounces for 2013 will undoubtedly be reversed in 2014 because of the mining strike in South Africa and the situation with Russia.
If you are considering an investment in platinum and palladium for either the short or long term, this may be the time to make that decision. Both of these metals but especially palladium, show the greatest future potential for profit among precious metals.