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PGMs: Rhodium the come back kid

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NEW YORK (Scrap Register): There has been a significant divergence of performance within the precious metals complex over the past 18 months. On the one hand gold and silver prices have been trading lower while on the other PGM prices have been more robust, with palladium prices hitting their highest levels since February 2001, said Deutsche Bank in a snippet.

Unlike parts of the energy and industrial metals complex where supply growth has been strong, production growth in the PGM sector has been weak with strike action in South Africa inflicting significant costs to the complex.

Deutsche Bank estimates that platinum palladium and rhodium production in South Africa will be down 29%, 37% and 26% respectively in 2014 compared to our estimates at the start of the year.  Moreover, Deutsche Bank sees a permanent reduction in South African productive capacity following strike action.

As a result, South African PGM production is unlikely to return to pre-strike levels and consequently Deutsche Bank views market deficits in platinum, palladium and rhodium as being larger and more durable than before.

Within the complex, Deutsche Bank bank views fundamentals as strongest in palladium.  However, a more constructive outlook for rhodium is also appearing.

In terms of palladium demand, the US and China remain the dominant players.  In China, PGMs will play a significant role in reducing the country’s pollution problem.  The combination of low car penetration compared to other more developed markets and increasing emissions standards will mean that China will be the largest single source of increased autocat demand for the PGMs.

The increasing penetration of gasoline engines in Europe would also suggest that upside risks for palladium demand may even exist in the event of a European recovery.

Whilst the medium term outlook for palladium remains robust, Deutsche Bank thinks the risks of a price correction, greater than the “usual” USD100/oz magnitude is rising. Investor net longs are at a near-term high, and they have seen the first signs of palladium outflows of the ETF. The firm thinks the catalyst to a sharp liquidation in net longs on the Nymex and further ETF outflows could potentially be weaker than anticipated China vehicle sales growth, especially given the tough comps in H2.

There is also an increasingly strong fundamental picture emerging for rhodium.  Not only is rhodium the most effective of the PGM group at treating NOx emissions it is also benefiting from the rapid gains in palladium prices, which will increase the appeal of rhodium on a price comparison basis.  While rhodium inventories are high currently, they are forecast to fall modestly over time and hit critically low levels by 2016.

While rhodium ETFs have enjoyed fresh inflows, the scale of holdings relative to market size and above ground inventories is relatively low compared to the other PGMs. Consequently, Deutsche Bank sees room for more inflows into rhodium ETFs, particularly if the scale of inflows into platinum and palladium markets is a reliable guide.

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