Getting in Platinum and Palladium Ahead of the ETF Launch

By Laura Crigger

Earlier this month, London-based ETF Securities [ETFS] filed papers to bring the first bullion-backed platinum and palladium ETFs to the U.S. - a move that may shock many longtime precious metal investors.

After all, the last time the idea of stateside platinum and palladium ETFs was floated, way back in 2007, it met with so much resistance that ETFS chairman Graham Tuckwell personally quashed the rumors, telling Reuters, "I don't think there will be a listed platinum or palladium ETF in the United States."

This time, however, the filing was met with almost complete silence. What changed?

Blame it on the Big Three. The auto industry's collapse has changed everything, making it possible for ETFS to bring its platinum and palladium funds - already very successful in Europe - to the States.

But as investors grow increasingly hungry for safe havens and cold, hard bullion, could the new funds mean shortages ahead?

The Catalytic Converter Demand

Platinum and palladium aren't just for bridal rings, although their popularity as jewelry in China, Japan, the U.S. and elsewhere makes up roughly 20% of demand. Instead, platinum and palladium are primarily industrial metals, used in everything from computer hard drives to fertilizers to fiber optic cabling.

They're especially useful in auto manufacturing, where the metals-especially platinum-are key ingredients in catalytic converters, which clean up noxious car exhaust fumes. Car manufacturers now account for about 55% of global platinum and palladium use, making the industry extremely vulnerable to metal shortages and price increases.

That's why U.S. automakers became so concerned two years ago, when ETFS first introduced its European bullion-backed platinum and palladium ETFs. Similar funds in the U.S., they argued, would tie up so much bullion that shortages would be inevitable.

Platinum miners also protested, arguing that hoarding would drive up short-term prices and devastate long-term industrial and jewelry demand. Anglo Platinum and Impala, the world's largest platinum producers by volume, even publicly refused to supply platinum for the new funds.

Their worries weren't entirely unjustified, either: At 6 million troy ounces of demand in 2008, the platinum market is much smaller than gold's, at 107 million ounces; or silver, at 889 million ounces. Because an ETF would remove physical metal from the market, even a small one could considerably impact prices.

But a lot can happen in two years. The global auto industry has since collapsed, and for the moment, U.S. car makers clearly have larger problems at hand than the cost of their catalytic converters. That preoccupation has not gone unnoticed by ETFS, who has pounced on the opportunity to file its new funds.

If approved, ETFS' new funds would allow U.S. investors access to physical platinum and palladium bullion, with the share price of each equal to 1/10^th the value of an ounce of the respective metals, according to the ETFS Platinum Trust and Palladium Trust registrations.

White Metal Supply And Demand

Of course, there's no guarantee that the SEC will even approve the filings, says the Wall Street Journal, given the debate over speculation in raw materials prices. And even if the funds are approved, they still face major supply and demand headwinds.

In 2008, platinum and palladium prices peaked and then tumbled into free fall, with palladium dropping 50% and platinum almost 65%. Shriveling auto demand accounted for much of the decline, but oversupply in both metals also depressed prices. Surpluses are expected to continue well into 2009, and perhaps even 2010. In that case, an ETF might actually prove beneficial, by removing some metal from circulation.

If and when auto sales will recover remains unclear. There are some bright spots in the industry, like China: In March, the country's car sales rose 10%, and minivan sales rose 40% over levels from the same time last year. German car sales have also gotten a shot in the arm from "cash-for-clunker" programs, in which the government offers consumers incentives to trade in their old vehicles for newer, higher-efficiency cars.

The increase in auto demand, as well as news of a $153 billion economic stimulus package in Japan (typically a huge consumer of platinum), have helped to send prices of both metals back up to their highest levels in six months.

Although industrial demand remains shaky, it hasn't stopped individual investors from seeking out platinum and palladium as safe havens, judging by the success of ETFS' existing European funds. ETFS' Physical Platinum ETF (LSE: PHPT.L) and Physical Palladium ETF (LSE: PHPD.L) have skyrocketed over the first three months of 2009, with the platinum fund's holdings rising 87% and palladium's rising 64%.

"The surge of inflows into physically-backed precious metals ETCs in the first quarter is unprecedented and reflects investors' concerns about current highly uncertain economic and financial conditions," Nicholas Brooks, ETFS Head of Research and Investment Strategy, told Commodity Online.

Playing Platinum And Palladium Before The Launch

If ETFS succeeds in launching its platinum and palladium ETFs, the funds would surely drive up demand, since investing in the fund would mean taking physical metal off the market and storing it in a vault. Therefore, investors may want to consider entering the platinum and palladium markets before that demand surge occurs.

To do so, U.S. investors have several pure-play options available to them. For example, NYMEX offers futures contracts for both platinum and palladium, trading in lot sizes of 50 troy ounces and 100 troy ounces, respectively.

Investors can also check out ETNS like the E-TRACS UBS Long Platinum ETN (NYSEArca: PTM), the E-TRACS UBS Short Platinum ETN (NYSEArca: PTD) or the IPath Dow-Jones AIG Platinum Total Return Sub-Index ETN (NYSEArca: PGM - although as credit notes, these instruments don't hold any physical bullion. Another ETN, the Elements MLCX Precious Metals Plus Index (NYSEArca: PMY), which held positions in both metals as well as gold and silver, closed earlier this year.

But given the potential for future price increases, individual platinum and palladium mining companies might be the best bet. Many miners only trade on foreign exchanges, but some companies available to American investors include:

• Stillwater Mining Co (NYSE: SWC), a Montana-based company that mines, refines and markets palladium and platinum. (Brad Zigler investigated this company in detail last year in "Good Days for Palladium?")
• Anglo American PLC (Nasdaq: AAUK), which mines a range of metals, as well as diamonds and coal.
• North American Palladium (AMEX: PAL), which despite its name also mines platinum, copper and nickel.

Comments

[Speedspirit:]

Do you know the etf to short these two plays that have run up to far too soon. China doesnt need to make that many cars!

Apr 22 07:39 PM

[Alan Young:]

Speedspirit, clearly you have not been researching the Chinese auto industry. They are making more cars than the US, and will continue to do so. However, many of these will be electric cars, which do not require catalytic converters. I would do more research before trying to guess where the market for these metals is headed.

Apr 22 09:54 PM

[ECONOMICS 101:]

Johnathan Vrozos agrees with Alan Young, but let's be light on Speedspirit. The basics of this ETF will need a new application soon beyond gas guzzling cars. The value is in the minute amount (6 Mln Oz) available annualy. Price manipulation/control will kick in and fast.
The illiquidity of the market should be a bigger concern than EPS/PPS.
By Johnathan Vrozos
johnathanvrozos.ca

Apr 23 08:35 AM

[Stock Gambler:]

I have been trading the Platinum side of the two thru PGM (an ETN fund) that is only on future contract(s) of platinum. So, you can go long or short

Apr 23 10:37 AM

[Speedspirit:]

The world economy is in a decline. The us was making a ton of cars last year too and they are still sitting there. China factories depended on the USA and with talk about zombie malls who needs Chinas goods. China employees wont be buying new electric cars.

Apr 23 07:26 PM

[Lara Crigger:]

As part of its stimulus package, the Chinese government included subsidies for rural citizens to purchase cars and light trucks, which is one of the reasons behind the 10%/40% uptick in car/minivan sales at home. (Bloomberg: www.bloomberg.com/apps...)

At the moment, those citizens aren't buying electric cars--they're buying normal ol' gas-powered ones, which require catalytic converters and thus, platinum and palladium.

On Apr 23 07:26 PM Speedspirit wrote:

> The world economy is in a decline. The us was making a ton of cars
> last year too and they are still sitting there. China factories depended
> on the USA and with talk about zombie malls who needs Chinas goods.
> China employees wont be buying new electric cars.

Apr 23 09:50 PM