The PGM metals — platinum and palladium — are typically highly correlated assets. However, since February of this year, they have diverged, with palladium pushing toward the highs while platinum has languished (Chart 1). This is a reflection of the relative strength of the U.S. economy vs. Europe. The primary use of both metals is in autocatalytic converters, with palladium used extensively in gasoline-powered engines (the type favored by Americans), and platinum used in the diesel engines that are much more popular on European roads. Chart 2 shows the sharp difference in demand for new vehicles in the U.S. and in Europe.
The demand side of the equation clearly supports palladium’s outperformance; however, the supply side may be shifting to favor platinum. About three quarters of the world’s supply of platinum comes from South Africa, a country plagued by social and labor unrest, as well as insufficient infrastructure, which leads to frequent power outages and mining delays.
The situation in South Africa appears to be getting worse. Whereas disputes between management and labor unions are nothing new, the heating rivalry between the long-dominant National Union of Mineworkers (NUM) and the upstart Association of Mineworkers and Construction Union (AMCU) threatens to slow or stop production at the world’s biggest platinum producers, and it has been growing increasingly violent. As we head into “strike season,” a common term in South Africa to describe the annual mid-year wave of labor walkouts and wage negotiations, this tinderbox of hostility seems primed to catch fire.
The situation worsened on June 3 when an NUM steward was shot dead at a Lonmin mine. Reports abound that workers are arming themselves and bringing weapons into the mines. Union leaders are doing little to douse the flames, with Joseph Mathunjwa, leader of the AMCU saying last week, “Even if you kill me or assassinate me there are those who will follow and take the baton,” following a shooting days earlier that killed another AMCU leader in a tavern. Violence, wildcat strikes, legitimate work stoppages: There is a multitude of risks that could derail South African platinum production. The market returned to deficit in 2012 according to GMFS, a leading precious metals consultancy, and is vulnerable to disruptions in supply (Chart 3).
Investors seem to have taken note, as inflows into physically-backed platinum ETFs have been strong, even while money flows out of the more popular gold- and silver-backed funds (Chart 4). With a growing source of new demand, at-risk supply, and a relatively low price compared with its sister metal palladium, platinum looks set to outperform in the near term, at least through the “strike season.” Protective stops should be placed below the recent low of $1,430.