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Platinum group metals set to outshine gold

10 november 2009

Platinum group metals are set to further outstrip gains in gold this year as expectations for a rise in car demand and concern over the supply outlook point to a tighter market balance for the autocatalyst materials, says.

Palladium has made particularly stellar gains - up 75 percent so far this year against platinum's 48 percent and gold's 20 percent - amid weak Russian supply and a relatively stronger outlook for U.S. than European car sales.

Prices of fellow platinum group metal rhodium have also risen 70 percent this year.

Hope for a sustained global economic recovery are placing the metals on a surer footing, should it materialise, analysts say.

"With industrial precious metals denominated in dollars, you cover all three bases - you can have an inflation hedge, a dollar risk (hedge) and you can get the benefit of recovering economic activity boosting prices as well," said David Wilson, an analyst at Societe Generale.

Deutsche Bank expects platinum prices to average $1,394 in 2010, and sees palladium at an average $321, while JPMorgan sees platinum at $1,338 in 2010 and palladium at $306, up from a forecast $250 for 2009.

Even though gold prices have hit historic highs, with a promising trajectory for next year, investors are starting to look more favourably at platinum.

"Looking at the two relative to each other, I would say over the next year, platinum has a better outlook than gold," said Nicholas Koutsoftas, a portfolio manager at GE Asset Management.

Around half of all platinum and palladium produced each year is bought by the car industry for use in catalytic converters. A sharp drop in automotive demand knocked platinum group metals prices in 2008 as the onset of recession hit car buying.

A recovery in car sales throughout this year has largely been attributed to government incentives - or "cash for clunkers" - schemes, but with the economy set for a recovery, analysts are optimistic that real demand will materialise.

"Auto manufacturers likely used "cash for clunkers" to clear PGM stock," said JPMorgan.

"That said, a metal in which investor interest is absolutely limited - rhodium - has increased this year... so there has no doubt been a modest improvement in demand, accentuated by tight supply."

Reports suggest car demand from China, the world's biggest automobile growth market, is on the rise. Foreign automakers reported strong sales in the first three quarters of the year in China, largely due to government policy initiatives.

On a global scale, palladium is set to benefit most from a demand recovery. The main market for palladium-heavy autocatalysts - chiefly used in petrol cars - is the United States, so signs the U.S. may emerge more strongly from recession than Europe could be good news for the metal.

"A lot of people are looking at European versus U.S. demand," said ETF Securities' head of research Nicholas Brooks.

Buying of platinum- and palladium-backed exchange-traded funds has also added a key layer of demand. Holdings of ETF Securities' palladium fund have risen 388,000 ounces to record levels this year - almost matching total investment demand for palladium in 2008.

Its platinum holdings have also doubled this year, and the company is in the process of seeking approval for new platinum and palladium ETFs in the United States.

On the other side of the coin, concerns linger over the supply outlook from South Africa, source of four-fifths of the world's platinum and nearly a third of its palladium.

Industrial action continues to rumble over miners' pay. Number three platinum producer Lonmin said after posting a 25 percent fall in fourth-quarter sales that South African precious metals miners are likely to face more tough times.

"We are seeing wage increases at well above inflation rates, which makes managing costs difficult in a highly labour intensive environment," Chief Executive Ian Farmer told Reuters.

For palladium, there are also concerns over another major source of supply - Russia. Last year its stockpile sales represented 960,000 ounces of supply, according to metals consultancy Johnson Matthey, pushing the market into a surplus of 460,000 ounces from a deficit of 500,000 ounces.

With the size of existing stocks a state secret, how much longer they can keep plugging the supply gap is uncertain. Societe Generale estimated in a September report that Russian exports were down 20 percent in the first seven months of 2009.

"The general feeling in the market is that Russia can't be sitting on top of too much in the way of stockpiles any more," says Standard Bank analyst Walter de Wet.