Platinum and palladium were once best-known for their role in cleaning up emissions, thanks to their use in catalytic converters. A pair of new funds from ETF Securities has thrust them into a newer spotlight: platinum and palladium as investments. These physically-backed funds, which are a first in the United States, have left millions of investors with platinum on the brain.
Try this on for size: before ETFS Physical Platinum (NYSEArca: PPLT) and ETFS Physical Palladium (NYSEArca: PALL) came to market, investment demand was low. Now, investment demand accounts for approximately 11% of total platinum market demand.
Other key drivers of platinum’s price are demand in jewelry – platinum is an especially popular metal used in engagement and wedding rings – and in catalytic converters, which are in more demand than ever as a result of the fight against climate change. [How Metals ETFs Changed Investing.]
But one of the biggest concerns of the market is the issue of supply.
This year the platinum market is likely to enter into a deficit. “Demand is increasing – jewelry demand, autocat demand and investment demand – and the supply has not increased in comparison,” says Shamim Mansoor, head of precious metals sales at ETF Securities. [3 ETF Trends Being Spotted Right Now.]
One of the biggest factors affecting supply is the state of mines in the world’s biggest platinum producer: South Africa. Three-quarters of the world’s platinum is mined in this country and costs there are rising fast. Labor costs have increased by more than double the rate of inflation and oil prices, another component of cost, are going up, too.
But it’s South Africa’s notorious problems with its power producers that really throw a wrench into the machinery. The cost of electricity went up 25% this year with a further 26% in 2011 and 27% in 2012.
With the rising costs, Mansoor says, the marginal cost of production becomes too high and it becomes uneconomical to continue mining. “There is a lead time. You can’t just turn a mine on and off.” she says. It takes about five years to build a mine and get it to the production stage. [Fundamentals Favoring Platinum and Palladium ETFs.]
The cost of exploration and mining will continue to be among the issues that platinum miners will face, Mansoor says.
The power situation in South Africa has a potentially dire situation looming. The country has one utility, state-owned Eskom, and it provides power to 95% of South Africans. Demand in winter is historically at a peak of 36k megawatts; the World Cup in June could stretch demand even further. “Eskom potentially does not have enough supply to meet peak winter demand, and Eskom has committed to providing the World Cup with uninterrupted supply.”
Something has to give, and the solution may be a severe one: in order to have enough power with which to supply the World Cup, miners may have to reduce production. The last time this happened in January 2008, platinum prices shot up to $2,100. No one has definitely said this would be done, but it’s a possibility. [Your Guide to Investing in Metals ETFs.]
The issues with rising costs (labor, oil and power supply) are just the attendant risks of most metals; it doesn’t mean they’re unappealing investments. “I think pretty much any investment is risky,” Mansoor says. “There’s a downside and an upside. You always have to be aware that the price can go the other way.”
For more stories about platinum, visit our platinum category.
There are an increasing number of ways to get your platinum and palladium exposure, including:
- ETFS Physical Platinum (NYSEArca: PPLT)
- ETFS Physical Palladium (NYSEArca: PALL)
- UBS E-TRACS Long Platinum ETN (NYSEArca: PTM)
- UBS E-TRACS Short Platinum ETN (NYSEArca: PTD)
- iPath DJ-UBS Platinum ETN (NYSEArca: PGM)
- First Trust ISE Global Platinum Index (NASDAQ: PLTM)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.