Palladium challenges platinum's shine

Palladium use in jewellery in place of platinum was on the rise, thanks to its lower price in the global market.

The global precious metals major GFMS said in its inaugural 'Platinum & palladium survey 2004' that the price swing between the two exceeded $1,100/ounce since the peak of palladium's price spike in 2001. More importantly, consumers were rapidly becoming more flexible and were ready to switch between, or mix, them.

The prevailing price differential between platinum and palladium was expected to narrow. Consuming markets were already responding to the premium that platinum currently enjoyed over palladium.

Jewellery fabrication accounted for 35 per cent of global net platinum demand in 2003, and for 5 per cent of net palladium demand. But platinum jewellery sales slipped in most regions in 2003. Sales were higher only in north America. In contrast, global palladium offtake in jewellery increased by 8 per cent.

The most important jewellery market using the metals continued to be China. It accounted for 55 per cent of the global net demand for jewellery in 2003, down from 60 per cent of the global market in 2002.

China's share fell because growth in consumption of platinum in jewellery was was not enough to compensate for decline in use in fabrication. The key issue was inventory management.

Jewellers struggled to hold retail price points. So purchases were healthy, but margins were under pressure.

Stock levels in the industry have been historically high. The combination of high stocks and low margins led to a decline in the risk-adjusted returns on platinum jewellery making. This forced fabricators to reduce inventory levels and use other white metals.

White gold demand rose as a result. Palladium demand rose as well in the Chinese jewellery market as some small and medium-sized fabricators in Shenzhen switched over to palladium.

Japanese fabrication of platinum jewellery fell in 2003, but the overall drop in global demand meant Japan's share of offtake was almost unchanged from 2002, at just over 22 per cent of the total.

Platinum supply has been short of demand since 1999. Platinum witnessed 74 per cent increase in demand for emission control catalysts, largely driven by rising sales in Europe of diesel-powered vehicles.

Growth in China's jewellery industry offset contraction in jewellery demand in Japan. So despite expanding mine output, supply failed to keep pace with growth in demand.

The outlook said if planned increases in mine supply were executed, the shortage of platinum would end. If supply fell short, it would become pricier. This should choke jewellery demand.

Palladium's deficit had eased considerably since 1999 thanks to substantial reduction in emission control usage, partly in response to the earlier price spike. Its use in electronics had halved since 1999 as it became pricier, but its use again growing in this sector.

Supply had gone up 14 per cent too. Russian sales from inventory fell in 2002 and 2003, with the void filled by the draw down of substantial inventory by the automotive sector.

There was a problem with inflated NYMEX inventories. Some palladium was shipped into London too as part of the Norilsk transaction for a 51 per cent stake in Stillwater, and this had been already placed in the market. At present, there was no firm evidence on availability of fresh palladium inventory.

Consequently, the market would look for expanded mine supply and supply from scrapped emission control catalysts. If this supply growth failed to match demand, palladium price would also rise.