FromFord Motor Co. to Fortunoff to Schroders Plc., the demand for palladium is increasing fast enough to outstrip supply and make it this year’s best investment among precious metals.
Sales will rise 6.5% in 2007, according to precious metals consultant CPM Group, after Ford, General Motors Corp. and other auto makers used 32% more palladium in car- exhaust systems the past five years. Fortunoff started selling palladium wedding bands in November and says the metal already represents 10% of the market.
Supplies of palladium are declining because Russia, the producer of about half of the global supply, will slash exports for the second straight year, according to Johnson Matthey Plc., the largest marketer of the metal. Palladium may jump 37% to $500 (Rs20,500) an ounce by end of the year, says Gerry Schubert, director of metals in London at Fortis, Belgium’s biggest bank.
“We’re positive long-term on palladium,” said Christopher Wyke, commodities product manager in London at Schroders, the money manager with $1 billion invested in commodities including pallad-ium. “There’s very few new sources of supply coming in the market, and the demand is growing.”?
Speculators?have?amassed a record bet in New York palladium futures, holding a net 11,873 contracts as of 8 May, six times more than at the start of the year, according to the Commodity Futures Trading Commission in Washington. The total slipped to 10,665 as of 15 May, data show.
It doesn’t hurt that palladium is the second-worst investment among precious metals after gold in the past 12 months. Palladium is up 7.9% this year.
Bruce Kovner’s Caxton Associates LLC of New York and Kenneth Griffin’s Citadel Investment Group LLC in Chicago are both investing through stakes in Stillwater Mining Co., the only US producer of palladium and platinum. A Caxton spokesman didn’t respond to requests for comment and a Citadel spokesman declined to comment.
“People believe that the palladium market is in balance, and they’re looking for demand to move from platinum and rhodium to palladium,” said Francis McAllister, chief executive officer of Stillwater Mining. “As that move progresses, the market may well have a shortage.”
Palladium has fallen 66% from a record $1,090 in January 2001, when Russia stopped exports, a decision that ended in a $1 billion loss at Ford.
The Dearborn, Michigan-based carmaker at that time used forward and option contracts to lock in its palladium costs on concern prices would climb for the 1.5 million ounces it used in North America. Prices plunged 72% by October 2001 to $305, creating the loss.
Car makers use the metal to meet government curbs on automotive exhausts. Umicore SA, the Brussels-based metals company, developed palladium-based pollution-control devices for diesel cars in 2004. The?metal?wasn’t?used for diesel-powered cars until last year, said Johnson Matthey.
Palladium in so-called catalytic converters rose 3.9% in 2006 to 4.02 million ounces, while platinum consumption increased 11% to 4.2 million ounces, according to Johnson Matthey. Palladium is now a cheaper alternative.
“There are guys in white coats who are always trying to raise the amount of palladium that can be used,” said Cara Geffen, a fund manager at Investec Asset Management in Cape Town.
“Diesel catalysts are predominantly platinum based. The physical properties of platinum far outstrip palladium. Twenty-five per cent substitution of platinum is the cap.”
Brides and grooms are also seeking an alternative to platinum. North American jewellers doubled the use of the metal last year to 40,000 ounces, and European sales increased for the first year in at least a decade, according to Johnson Matthey. More gains are likely, said Ruth Fortunoff, vice-president of Fortunoff’s jewellery merchandising.
“We definitely expect the sales to keep increasing,” she said. “People don’t come asking for palladium, but when they become more educated about the pricing and about the metal, they are sold on it.” The average palladium band is about half the price of a $1,200 platinum ring.
The rising demand is benefiting OAO GMK Norilsk Nickel of Russia, the world’s largest palladium producer, and Russian President Vladimir Putin, whose government controls the nation’s exports through annual licences. Russian exports last year were?33%?below?their?1998 ?peak. Russia’s supplies of palladium last year, which Johnson Matthey estimates at 3.9 million ounces, outstripped the 2.95 million ounces from South Africa. North?America supplied 985,000 ounces and Zimbabwe?mined?142,000 ounces.
Russia’s central bank also holds an undisclosed amount of palladium. The figure has been a state secret since the days of the Soviet Union. Those inventories probably total five million to eight million ounces, according to Derek Engelbrecht, marketing director of Johannesburg-based Impala Platinum Holdings Ltd, the world’s second-largest platinum producer.
The world’s largest known deposits of palladium are located above the Arctic Circle. Development of the mine began in the 1930s, with the creation of Joseph Stalin’s forced labour gulag system. Production started in 1939.
Platinum and palladium are mined together from underground deposits that usually also contain gold, nickel and copper. Almost all of the world’s reserves lie in South Africa, Finland, Russia and Zimbabwe, with small fields in the US, China and Canada.
The Russian government has always controlled the export of palladium and platinum and, until this year, used a quota system. A decree by Putin annulled the quotas on 15 January, while leaving in place another Soviet-era restriction requiring Norilsk to export through state-owned trader Almazjuvelirexport.
The palladium-export licence expires in 2009.
Restrictions on the supply of palladium have made the metal a favourite among hedge funds. The speculative long positions, or bets prices will rise, in palladium are larger than in platinum, which has gained 16% in price since the end of last year, or more than twice as much. “Platinum has been go, go, go,” said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York, including investments in platinum and palladium.
The creation of exchange-traded funds linked to the price of platinum will spur demand for that metal and encourage more manufacturers and jewellers to use palladium as a cheaper alternative,Michael Gambardella, an analyst at JPMorgan Chase & Co. in New York, wrote in a report.