DETROIT () -- Industry specialized financial analysts seem to have short memories. They typically don't want to be judged by any past performance that is more than a year or so old. They want only to give advice on future trends that are extrapolated from their detailed knowledge of current events. That way if a prediction doesn't turn out to be true they can claim that this was due to data that was faulty because contemporary reporting is often erroneous or incomplete and therefore subject to correction.
Today's palladium price is, I believe, partly rooted in events that occurred during the late 1990s and ended in 2001. Palladium today, in June 2006, is in oversupply as it has been for at least five years according to Johnson-Matthey's industry bible, the Platinum Book.
The supply figure that Johnson-Matthey calculates by adding the amount of new metal produced at the mines (and processed by the refiners) to the amount of metal recycled, primarily, from spent automotive catalytic converters, has exceeded the global demand for the last five years creating a supply overhang that the figures from Johnson-Matthey allow one to calculate at a total of 6 million ounces today.
I think that many contemporary financial analysts dream of the good old days of December 2001, when palladium was $1,039 an ounce, without taking into account its late 1990s price of less than a tenth of that. They opine that the low price of palladium back then was, somehow, artificially set, as gold's price had been in the U.S. prior to 1973, and that a true price, for palladium, was achieved in December of 2000. Some of them hint that, although the fundamentals of palladium argue for a much lower price than even today's the "technical" factors are set for a run up to a true value based on a combination of fundamental and technical "considerations."
In my opinion the best word one can substitute for "technical" in the paragraph above is "speculative."
I want to re-visit with you those days of yesteryear, the turn of the 21st century, when palladium was pushed to a price of $1,039 per ounce. I suspect that price will always be, in inflation-adjusted dollars, the all-time high for palladium.
What caused the palladium price to increase by more than 500% in the last years of the twentieth century and the first one of the twenty-first century? It was coltan. What?
Did you ever hear of coltan, the principal ore of columbium and tantalum? Probably not, because the crisis caused by its perceived short supply is long over, and the strategic metal, tantalum, the shortage of which analysts were so concerned about in the ancient times of the late twentieth century, is no longer used for the purpose that was perceived to be the cause of the demand for tantalum exceeding the supply. Here's a hint as to why you should have heard of coltan: The first material considered and used to replace tantalum in its then major use was palladium.
The coltan crisis in the late 1990s manifested itself in two ways: First, a perceived shortage of this ore of columbium and tantalum caused the price of the metal tantalum to increase in price by a factor of between 5 and 10 as the decade progressed, and, second, it created the run up in palladium prices that peaked in 2000 when palladium sold for $1,039 per ounce. Palladium's price today still reflects, in my opinion, the long-gone "coltan" shortage crisis.
I was personally involved with a tantalite (another ore of tantalum) producing mine near Great Bear Lake, Manitoba, Canada in 1976. I recall that fabricated tantalum, used then primarily for surgical instruments and chemical processing equipment designed to resist temperature and corrosive materials, sold for $36 a pound, in 1976 dollars. Ten years later it was selling for less, in inflation adjusted dollars. A few years after that tantalum reached $400 per pound in 1999 dollars! What happened? The miniature cell phone.
In 1994 half of the world's tantalum production, mostly from coltan ores, was used in electronics. It was the critical material for efficient high-performance capacitors and the use of such capacitors was rising dramatically due to the personal computer revolution. Then the cell phone era began. Clearly the direction of the size of the phones was smaller and smaller. Motorola kept downsizing its phones and led the market in sales.
The analysts discovered tantalum from listening to Motorola strategic purchasing planners and confidently predicted that coltan supply would be a limiting factor in producing cell phones.
The colourfully named Australian company, Sons of Gwalia, Ltd. [ASX:SGW], became a darling of speculators, because it was a major miner of coltan ores (and also gold). Costs of mining coltan didn't increase but the prices exploded. Sons of Gwalia Ltd was in kangaroo heaven. Prices were going up, up, up.
Motorola predicted that there would be a billion cell phones in use in 2000. Tantalum for capacitors went through the ceiling.
The capacitor makers were diligently looking for a substitute for tantalum, and they found it in palladium that was, in 2000, much cheaper than tantalum. They made the switch in 2000. It was quite a year for the two metals. Tantalum began a rapid descent from its dizzy heights and palladium began a climb to new highs.
In the meantime it had been discovered that in the "slag" from Brazilian tin mines there was enough recoverable tantalum to supply all of the world's needs for some time, but this was not widely known or disseminated until after the rising price of palladium and a shortage of 1,160,000 ounces of palladium in 2000 had pushed the electronics makers to substitute the alloy nickel-silver and an actual silver alloy containing only 5% palladium for the pure palladium itself. The new alloys were not only much cheaper than palladium they were also cheaper than even the now reduced and descending price of tantalum.
At the same time the dental plans of major corporations had caught up with the palladium price. These plans had mandated relatively cheap palladium instead of the then much more expensive gold in the late twentieth century. Now the rising palladium price caused them to reverse themselves and mandate gold alloys instead of palladium ones.
While in 2000 there was a shortage of 1.16 million ounces, by the end of 2001, there was a global surplus of palladium of 560,000 ounces. But it would seem that information came too late to save the Ford Motor Company from taking a $1 billion hit.
As the price of palladium was skyrocketing during late 2000 and early 2001, Ford made a commitment to buy, on a take or pay basis, a substantial amount of palladium. Many in the OEM automotive industry believe that Ford was paying substantially over market for palladium as recently as last year and in doing so buoying up a major palladium producer that otherwise, due to its high cost of production, would be unable to sell its metal, even at today's prices, into today's surplus laden market.
Two years ago Ford took a charge against earnings of at least $1 billion to cover the difference it was paying for palladium and the market price both then and into the foreseeable future. It had been losing money on palladium almost from the first month after it made its take or pay deal, and the total amount contracted for or the average amount guaranteed to be paid by Ford has never been revealed.
At the March 2001 PDAC, a man from the strategic management unit of an OEM automotive company told a meeting of palladium producers, bankers, and analysts (no other end users other than the speaker were present) that by the end of 2002 palladium would be priced at "around $250 an ounce. They scoffed at him and asked him on what he based his "prediction." He told them it was on "fundamentals of supply and demand."
At the end of that year the palladium price had dropped from $1,039 per ounce at the end of the previous year to $260 per ounce and the surplus was zooming towards 2,000,000 ounces.
I think that a lot of people and hedge funds, in particular, have bought palladium as an "investment" during the last five years assuming that it would return to its true price as the production of cars and "cell phones" increased.
The man who spoke at the PDAC in 2002 recently said that the fundamental price of palladium is between $150 and $175 per ounce. Anything over that he says is technical. The analysts with whom he meets individually tend to look grim. Those he meets within groups are scoffing once again. Luckily none of them has to worry about being held accountable for their predictions in 2000 and 2001.
If you want to test an analyst's knowledge of the usage of metals such as palladium, platinum, rhodium and tantalum ask them about the coltan shortage-induced run up in price of palladium in 2001 and see what you get for an answer.
One last comment. It is widely beloved by analysts that palladium and platinum are interchangeable generally. This is not true. They are interchangeable in their function in emission control catalysts for cars powered by internal combustion engines, but diesel exhaust stream treatment seems to be using mostly platinum even though it is three times the price of palladium. Also fuel cells today must use platinum. Palladium substitution here is not gaining acceptance. Therefore any increased production of diesel engines or of fuel cell powered hybrids probably will not affect the demand for palladium. Also the small car revolution that is now ongoing will significantly reduce the need for platinum group metals in each vehicle.
Just to review: A perceived shortage of tantalum caused palladium to be substituted for it in its major use. Then a run up of the price of palladium caused base metal and base-precious metal alloys to be substituted for the palladium in this new use. While all of this happened information short analyst community ran the price of first tantalum, then palladium, way up and way down.
Now please tell me where you think the price of palladium is going. Are you sure that you have all of the facts?