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Commodity trading 101: platinum and palladium

Platinum is traded as an exchange-traded fund – ETF - on the London Stock Exchange under the ticker symbol LSE: PHPT and on the New York Stock Exchange as ticker symbol PPLT.

ETFS Physical Palladium (LSE: PHPD) is listed on the London Stock Exchange as PHPD. ETFS Physical Palladium Shares (NYSE: PALL) is an ETF traded on the New York Stock Exchange.
Platinum and palladium belong to the platinum group metals (PGMs) family, which also includes rhodium and ruthenium. Generally speaking, palladium and platinum can be found together and are mined by the same companies. Both are white metals used in the auto industry for catalysts, fuel cells, jewellery, industry and in medical appliances.

Prices

Platinum prices moved around a lot in 2012. From a low of $1,360 at the end of December 2011, prices shot up to over $1,720 by February. They fell back towards $1,400 by the end and were back up above $1,720 again in September and October. Towards the back end of the year they are bouncing around the $1,600 mark.

What's making the price move?

All the major spikes throughout 2012 are linked directly with what was happening in South Africa at the time. South Africa accounts for about 80% of global platinum supply.

2012 has been a year of unrest of the country's platinum miners. Protracted strike action at number two producer Impala Platinum's Rustenburg operations in Jan/Feb was behind the first jump above $1,700. Shafts were out of action for about six weeks, disrupting supply.
Once settled however, prices edged back down to their 12-month low (below $1,400 in July).

So what happened next?

Violent clashes at London-listed Lonmin's Marikana mine is what happened. Dozens were killed and labour unrest spread across the entire platinum mining belt, eventually affecting number one producer Amplats. Prices once again soared above the $1,700 mark.

Lonmin ended the strike by agreeing to a 22% pay hike. Amplats has also resolved its problems and the mines are operational again. But the threat of more strike action – especially with higher wage costs meaning job losses in 2013 could be on the cards – looms. With the strike actions dealt with, prices once again fell back.

But the supply side of things is just one half of the platinum trading picture. As with everything, demand is just as relevant.

Platinum is used in industrial applications, jewellery and medical appliances, but the big one to watch is the auto industry, with platinum used in catalysts and clean diesel engines (50% of new cars in Europe are clean diesel).

What's the outlook?

A substantial reduction in supplies will move the platinum market from surplus to  deficit in 2012,  according to Johnson Matthey's Platinum 2012 Interim Review.
Severe disruption to pgm mining is expected to reduce sales from South Africa and result in a 10% drop in worldwide platinum supplies to 5.84 million ounces.  

Gross demand is predicted to remain  firm, at 8.07 million ounces, while a decline in recycling will help decidedly shift the market into a deficit of 400,000 oz.
Platinum supplies from South Africa should fall by 12% year-on-year to 4.25 million ounces, an eleven-year low.

South African platinum production losses due to strikes and safety stoppages  in the first three quarters of 2012 are estimated to be at least 300,000 oz. 

The closure of marginal operations by some junior producers and below-plan performance at other mines will also account for some reduction in supply this year. Output and sales of platinum from other producing regions will remain broadly flat.

Gross platinum demand in autocatalysts is predicted to soften by 1% to 3.07 million ounces.

All in all, the outlook long-term seems to suggest prices will fall, possibly a long way. But the short-term movements in the price are less predictable.

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