Analysis of the platinum group metal (PGM) markets looking at traditional supply and demand fundamentals does not explain the price levels for these metals today. Only when investment inflows are taken into account does the picture become clear and begin to explain how prices can remain high even when markets are technically over-supplied.
There is a disconnect between the fundamentals and the price dynamics of the PGM markets, according to Paul Walker, global head of precious metals with Thomson Reuters GFMS, who spoke this week at the annual Investing in African Mining Indaba conference in Cape Town, South Africa.
“The prices we see prevailing in the PGM space are somehow below equilibrium sustainable levels,” Walker said, adding that GFMS data shows that platinum, for example, has been mostly in surplus for the past five or six years. Normally this would create price pressure, yet prices have remained relatively elevated. What has been driving the price, Walker explained, comes down to investment inflows, which can create significant price volatility in the relatively small PGM markets.
“The wedge that is driven between the fundamentals and the overall price behavior – the price dynamics – is this thing called investment,” Walker said. This is influencing price despite that fact that underlying fundamental supply and demand dynamics will prevail in the long term.
In the case of platinum, the persistent oversupply has caused prices to recede somewhat, but Walker indicated that in the normal course of events, they should have fallen further.
The posture of the palladium market is the exact opposite of platinum’s. In previous years palladium was influenced by stockpile outflows from Russia, although this is no longer the case. But investment activity has also become a factor in the palladium market.
“There is the issue of how much palladium is held in stocks in Zurich,” for example, Walker said. As with platinum, “the key driver at the margin – the thing that can actually drive these prices – (is) investment flows into these markets,” he added.
“The order of magnitude of these investment flows – the intersection between the fundamentals of supply and demand, and how investment moves around that equilibrium point – can be tremendously influential. And the dollar value required to go into any of these markets – especially platinum and palladium – is relatively small,” Walker said, indicating that far less investment inflows are needed to influence the PGM markets compared with many other metals markets.
“A market that’s in fundamental surplus requires a constant inflow of new cash to keep the price where it is today. In the case of gold – at $1,700 (per ounce) – the run rate to absorb that surplus over the course of a year will run somewhere in the vicinity of $100 billion,” Walker said.
“In the case of platinum, it’s probably in the neighborhood of $1-2 billion – a drop in the ocean. But – and this is a big “but” – if investors looking at these markets, for whatever reason, on a given day decide not to drop in $5 million or $50 million… this is where you see tremendous volatility in the price,” Walker said. “The distortionary impact of these investment flows should never be underestimated.”
“The direction and trajectory of these markets over the next few years is going to be determined at the margin by the willingness of investors globally to put their hand in their pockets and fund these things.” Walker said. He added that if these investment inflows were to cease for any period of time, PGM prices would invariably decline.
Some charge that investment inflows distort the PGM markets, but Walker said the primary cause of investor behavior continues to be low interest rates.
“The reason people are coming into these markets has absolutely nothing to do with fundamentals. … That will be a feature of the markets until we get back to what I would describe as normality,” Walker said. “The overriding landscape globally has been one of people searching for yield in alternative assets.”
“We’ve ridden this uptrend very well … but there is an end game that’s going to be played out,” Walker summarized. “Eventually fundamentals will reassert themselves. But I think we’re in for a bumpy ride over the next… certainly six months, or twelve months, or it could be as long as 36 months.”
Chris Munford researches and writes about commodities, with an emphasis on steel raw materials and energy. He is based in the New York area.