JPMor­gan talks bull

Pal­la­dium price should con­verge to around half that of plat­inum

Finweek English Edition - - Economic trends & analysis - GARTH THE­UNIS­SEN

SUS­TAINED HIGH plat­inum prices have again prompted global fi­nan­cial ser­vices group JPMor­gan to re­vive the ar­gu­ment that au­to­cat­a­lyst man­u­fac­tur­ers – and to a lesser ex­tent jew­ellery mak­ers – will in­creas­ingly sub­sti­tute plat­inum with cheaper pal­la­dium, with ob­vi­ous ben­e­fits for plat­inum’s cheaper cousin.

JPMor­gan ex­pects pal­la­dium to hit US$430/oz by fourth quar­ter 2007, with av­er­age prices for 2008 and 2009 pro­jected at $455 and $489 re­spec­tively. Al­though the 2010 price is ex­pected to av­er­age $510/oz, JPMor­gan sees the av­er­age real price of pal­la­dium over the next 25 years at $460/oz in to­day’s money – just un­der half the $1 100/ oz price it es­ti­mates for plat­inum over the same pe­riod.

That bol­sters the bank’s pre­vi­ously aired view that over the long term pal­la­dium should con­verge to a price of roughly half that of plat­inum. Pal­la­dium is cur­rently trad­ing at $350/oz – just 28% of the plat­inum price of $1 244/oz at the time of writ­ing. If JPMor­gan’s the­ory is cor­rect the metal could still gain $272 over the long term.

The cen­tral pil­lar of JPMor­gan’s favoured sub­sti­tu­tion the­ory is that au­to­cat­a­lyst man­u­fac­tur­ers – who ac­counted for just over 50% of plat­inum de­mand in 2006 – will in­creas­ingly sub­sti­tute plat­inum with pal­la­dium, de­spite the dif­fi­cul­ties that sur­round the lat­ter’s ap­pli­ca­tion, par­tic­u­larly in dieselpow­ered ve­hi­cles.

“We can see no good rea­son why man­u­fac­tur­ers of gaso­line-pow­ered ve­hi­cles would want to use plat­inum au­to­cat­a­lysts con­sid­er­ing the huge price dif­fer­ence [be­tween plat­inum and pal­la­dium],” says JPMor­gan.

Al­though cur­rent tech­nol­ogy ren­ders pal­la­dium diesel un­friendly, JPMor­gan is es­sen­tially bank­ing on an in­evitable tech­no­log­i­cal break­through that will see greater pal­la­dium weight­ings in diesel-pow­ered ve­hi­cles.

“They’re ob­vi­ously mak­ing a long-term as­sump­tion that there will be a break­through in diesel ap­pli­ca­tion for pal­la­dium,” says one an­a­lyst.

“They ob­vi­ously feel that isn’t an in­sur­mount­able sci­en­tific prob­lem and you have to ad­mit there’s a great in­cen­tive for a break- through to be made.”

Al­though one ounce of plat­inum can’t be re­placed with one ounce of pal­la­dium – the re­place­ment ra­tio is be­tween 1,5 and 1,8 times – the fact that plat­inum is around 3,5 times more ex­pen­sive than pal­la­dium means the lat­ter would be a re­ward­ing al­ter­na­tive if there was a break­through.

But there are some po­ten­tial facts that could ren­der JPMor­gan’s the­ory a dud.

Car man­u­fac­tur­ers are still cau­tious of putting their faith in pal­la­dium af­ter its price spiked to more than $1 000/oz in 2000 from around $438/oz a year ear­lier. That this price spike oc­curred af­ter the Rus­sian state trea­sury slapped a ban on PGM sales in 2001 means the pain en­dured by man­u­fac­tur­ers is still fresh in the mind. Rus­sia is the world’s largest sup­plier of pal­la­dium, ac­count­ing for 50% of to­tal sup­plies.

SA’s Cat­alytic Con­verter In­ter­est Group (CCIG) is also doubt­ful con­cern­ing pal­la­dium sub­sti­tu­tion, say­ing that with cur­rent tech­nol­ogy it’s only pos­si­ble to re­place around 25% of the plat­inum used in au­to­cat­a­lyst man­u­fac­ture with pal­la­dium for diesel-en­gine ap­pli­ca­tion. The process is also ex­pen­sive, which lim­its some of the cost gains from switch­ing to pal­la­dium.

Given that SA pro­duced 14%, or one in seven, of the world’s cat­alytic con­vert­ers in 2005, the CCIG does have some cred­i­bil­ity.

How­ever, JPMor­gan sees things very dif­fer­ently. “We be­lieve the wounds in­flicted on car pro­duc­ers by the price spike must have healed by now – so we ex­pect the move away from plat­inum to pal­la­dium to con­tinue apace. We have been, and re­main, pal­la­dium bulls.”

Al­though JPMor­gan con­cedes that fears of sup­ply over­hang due to large Rus­sian stock­piles and in­creas­ing re­cy­cling vol­umes flow­ing back into the mar­ket are price neg­a­tive for pal­la­dium, it be­lieves there are some com­pelling bull ar­gu­ments that out­weigh the neg­a­tives.

It also says: “The po­ten­tial ex­ists for ex­plo­sive growth in the fledg­ling pal­la­dium jew­ellery mar­ket” thanks mainly to the sus­tained high prices of com­pet­ing pre­cious met­als gold and plat­inum. JPMor­gan ex­pects de­mand for pal­la­dium jew­ellery to grow by 15%/year over the next two years be­fore mod­er­at­ing to 10%/year growth in 2009. Jew­ellery de­mand is fore­cast to snap up 1,629m oz of pal­la­dium by 2009 com­pared with 1,12m oz in 2006.

As a con­se­quence of the move to pal­la­dium, JPMor­gan pre­dicts a fall in de­mand for plat­inum jew­ellery over the next three years from 1,74m oz this year to 1,287m oz in 2009. That amounts to falls of 11,5%, 11% and 6,1% in each of the next three years.

In­ter­est­ingly, JPMor­gan doesn’t be­lieve the plat­inum price will suf­fer too se­verely from the pro­jected in­crease in the use of pal­la­dium as a sub­sti­tute for plat­inum.

With jew­ellery de­mand ac­count­ing for just un­der 25% of plat­inum use, there’s still plenty of scope for plat­inum to ben­e­fit from the ram­pant in­crease in diesel-en­gine ap­pli­ca­tions. Net au­to­cat­a­lyst de­mand for plat­inum is still pro­jected to growth at 15,6% this year and 12,5% in 2008 be­fore mod­er­at­ing to 6,4% in 2009.

“The de­mand out­look for the en­tire PGM com­plex looks fan­tas­tic,” says JPMor­gan’s Jon Bergth­eil. “Thanks to in­creas­ingly strict emis­sion reg­u­la­tions, the whole bas­ket of PGM de­mand will ben­e­fit. The fact that pal­la­dium will take a big­ger share of that bas­ket doesn’t nec­es­sar­ily mean plat­inum will suf­fer.”

PAL­LA­DIUM... DUE FOR A RE­BOUND?

Source: I-Net

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