Palladium set for glum October as demand outlook weighs

The metal's September gains were driven also by a surge in platinum prices after labour unrest in the South African mining sector led to dozens of deaths and cut output.

Author: Jan Harvey

Palladium is heading for its biggest one-month drop since May in October as a weak demand picture for the autocatalyst metal reins in gains made on the back of U.S. monetary stimulus and a sharply higher platinum price.

Prices swung to their lowest since mid-August last week from the six-month high above $700 an ounce they hit in September, helped by euphoria linked to the Federal Reserve's $40-million-a-month liquidity boost for the U.S. economy.

As that dissipated, investors were faced with a glum underlying picture for the metal which, despite the promise of longer term support, could lead prices lower still.

"Palladium, even more than platinum, is dependent on what's happening in the auto industry," Bank of America-Merrill Lynch analyst Michael Widmer said. "And you have to say, Europe is not looking good, China car sales and production have for a good part of the year been relatively soft."

"The market is overall still tight, but that doesn't really matter if you have a lack of demand," he added.

A spate of carmakers in Europe, including Ford, Volvo, Daimler and Renault have released downbeat statements on production this month.

Even China, long seen as a rare bright spot for the motor industry, has shown signs of slowing. Chinese vehicle sales fell for the first time since January in September, and grew just 3.4 percent in the first nine months of the year.

"A lot of the excitement about palladium in 2010 was based on growth in car sales in China and other fast-growing markets," Mitsubishi analyst Matthew Turner said. Palladium outperformed gold and platinum that year to more than double in price.

"These forecasts were assuming 10 percent growth every year for decades, and at the moment there's some scepticism about that. That has hurt the very bullish outlook."

That has led some investors to pull out of palladium investments like exchange-traded funds. Since the end of February last year, palladium ETFs have seen outflows of more than half a million ounces, while platinum ETFs have recorded inflows of nearly 210,000 ounces.

Palladium's more pronounced exposure to the industrial cycle - it also lacks platinum's strong jewellery demand base - helped push its ratio to its sister metal to its highest in nearly a year last week.

LABOUR UNREST

Palladium's September gains were also driven by a surge in platinum prices after labour unrest in the South African mining sector led to dozens of deaths and cut output at miners like Anglo Platinum, Lonmin and Royal Bafokeng.

Basing palladium investment on a rising platinum price under those circumstances was not necessarily a good bet.

While platinum supply is disproportionately reliant on South Africa, which accounts for around three-quarters of global output of the metal, palladium is not. South Africa makes up just a third of its supply base, with Russia the major supplier.

"If platinum rallies for fundamental reasons specific to platinum, palladium shouldn't follow," one platinum group metals trader said.

"If you have a broad commodities rally and a lot of the investment baskets buy platinum, they will probably have to buy palladium as well, so there is a reason for them to buy in tandem. They don't differentiate in that sense. But palladium shouldn't have rallied with platinum (in this situation)."

Longer term, the outlook for palladium will depend heavily on the health of the global economy. Once that starts to pick up, the advantages palladium has over platinum make it well positioned to move higher.

"It has become the metal of choice in cars - most cars are gasoline, and palladium has taken market share in diesel, because it does more or less the same thing, and it's cheaper," Mitsubishi's Turner said.

"The fact that it doesn't have a South African story means that, though it hasn't gained as much as platinum, in the long term it probably makes it more appealing to end users," he said. "The supply sources are more varied and less dependent on one country."

Global mining drives 45%-plus of world GDP – Cutifani

The global mining industry drives more than 45% of the world’s gross domestic product (GDP), either on a direct basis or through the use of products that facilitate other industries, says AngloGold Ashanti CEO Mark Cutifani.

Cutifani, who addressed this week’s Mining for Change conference, calculates that mining product revenue contributes 11.5% to global GDP; mining service industries a further 21% to 23% and fertilisers for agriculture, fuel for transport and materials for construction then take mining’s combined direct and indirect contribution beyond 45%.

The world would need to dedicate twice the amount of land to agricultural activities, which currently already occupy 40% of the earth’s surface, were it not for mining’s contribution to agricultural productivity.

Yet considerably less than 1% of the earth’s surface is dedicated to mining, which consumes less than 1% of the world’s water – and mined products also help to purify much of that water.

Furthermore, mining emits less than 3% of the world’s carbon gases.

“Mining’s the most important industrial activity in the world today and has one of the smallest environmental impact across the globe, which many people don’t appreciate.

“Instead of calling us the extractive industry I would like us to become known as the development industry,” Cutifani says, pointing out that 40% of the capital that AngloGold Ashanti is putting in place right now to develop its new Mongbwalu gold mine in the Democratic Republic of Congo is dedicated to infrastructure.

In addition to creating employment opportunities for the near-mine Mongbwalu community, the company is putting in place transportation, commercial and energy infrastructure that will enable local farmers to produce more and also to start transporting it to market.

“If we can get it right and benefit 80% of the people in that community instead of only maybe 3% who are given jobs, then the conversation around the mining industry will change and when people hear the word mining, they will think about development, jobs and social infrastructure. That’s the vision we have for our mining industry,” he adds.

By coordinating the involvements of developmental finance institutions, governments and mines, a strategy can be adopted for Africa that will be no different to the way pioneering industries helped to open up North America, South America, Europe and Russia.

Further, as the now-returned Chamber of Mines of South Africa senior executive Roger Baxter has often pointed out, the modern world would not have smart phones, wind turbines, toothpaste without mined minerals.

While minerals like oil, gas, coal and uranium energise the modern world, voguish gadgets are unable to function without copper, silver, gold, palladium, platinum, ceramics, titanium dioxide and lesser-known tongue-twisters like indium tin oxide.

The average car contains a ton of iron and steel, 100 kg of aluminium and 19 kg of copper and the more environment friendly hybrid vehicle requires double the copper, roughly 34 kg.

A 2 MW wind turbine contains some 300 t of steel, 5 t of copper, 3 t of aluminium and requires the casting of about 1 200 t of concrete, the cement for which requires limestone that is mined and stone that is quarried.

Replacing a single 3 000 MW coal-fired power station – which is half the size of South Africa’s many six-pack stations –15 000 MW of wind turbine capacity needs to be provided, which would require the equivalent a 2 MW wind turbine being sited every 240 m between Durban and Cape Town.

The modern compact energy-efficient fluorescent light bulb needs bauxite, lead, copper, limestone, nickel and phosphorous; toothpaste contains silica, limestone, aluminium, phosphate, fluoride and titanium; and women’s make-up mica and talc.

The minerals in greatest demand globally are coal, copper and iron-ore.

Edited by: Creamer Media Reporter