Yesterday’s reading of the inflation tea leafs in the US revealed that prices are rising at a fast enough clip to perhaps delay any further “offerings” by the Fed. At the very least, the gain in CPI – coming in at a figure twice as high as economists had anticipated – will augment the internecine warfare among the Fed’s policymakers as to which way to proceed. Recall that the latest meeting of the FOMC was dissent-laden on in nearly two decades. One of the items to debate is whether the US economy is indeed skirting a collapse or not. New York Fed President Dudley reaffirmed yesterday that the risk of falling from the current, apparently stagnant paradigm that the US economy finds itself in, to a full-blown contraction, is ”quite low.”
Finally today, let’s get back to an area where the next and most realistically attainable incremental gains might yet come from; the noble metals’ niche. The latest “White Book” report by ABN/AMRO and the good folks at the VM Group therein, suggest that “platinum and palladium have a bright future.” Certainly, when markets are viewed from the perspective of fundamentals as opposed to momentum/fear/greed/panic-based parabolas, the PGM sector offers quite a contrast to gold and to silver. The latter pair's members are both in surplus (1,700 and 7,000 tonnes respectively) and have been trading on pure emotion-based adrenaline.
The facts offered by the ABN/AMRO group of analysts speak volumes about the structure of the PGM market. To begin with, as regards platinum, 45% of its global offtake is accounted for by the automotive industry. In the case of palladium, the figure is even higher, at 60% of total consumption. Are there risks to the demand-side in this niche? Why, sure, but the likelihood of not achieving a 4 to 5 percent annualized growth in the auto sector remains fairly remote even at this juncture; that level of expansion is all that is needed to put pressure on supplies. Now, consider the five-year tally in auto sales growth rates in the BRICS countries: Brazil +11%, Russia +17%, China 29%. ‘Nuff said.
On the supply side, VM Group’s team notes that “South Africa produces about 80% of global PGM supply. As a result, political risk in South Africa is highly correlated with PGM supply risk. The political, macroeconomic and policy environments in South Africa have a particular resonance to the PGM market; more so than for any other country or any other metal – apart from perhaps China and the rare earth elements. Right now, the omens are not good.”
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America