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.