Will Rhind: While Auto Sales Key Driver Of Platinum And Palladium, Labor Issues Are The Real Wild Card

 |  Includes: PALL, PPLT
by: Hard Assets Investor

by Sumit Roy

Managing director of ETF Securities, issuer of the physically backed platinum ETF PPLT discusses the platinum and palladium markets.

William Rhind is managing director of ETF Securities, a leading independent provider of ETFs. The firm, which in 2003 pioneered the world's first physical gold ETF in Australia, has launched seven physically backed precious metals ETFs in the U.S. Those include the ETFS Physical Platinum Shares (NYSE Arca: PPLT), with more than $800 million in assets under management. HAI Managing Editor Sumit Roy spoke with Rhind to discuss the platinum and palladium markets.

HardAssetsInvestor: How would you characterize platinum and palladium fundamentals right now?

William Rhind: For both, the fundamentals are strong. We're in a structural supply deficit for both metals currently, and based on current consensus, that's expected to continue for the rest of this year. The key risk is the labor dispute situation in South Africa. If there is no material resolution of that, or it involves shuttering mines, then that could exacerbate the supply situation further and lead to an even bigger deficit.

HAI: Is the deficit in the platinum market all supply-related or is there a demand component as well?

Rhind: It's a combination of demand—which has recovered significantly from the depths of the financial crisis, particularly driven by stronger auto sales globally—and supply. The supply story is really about the producers, and the fact that arguably 70 percent of the platinum mines currently lose money or are at around breakeven in South Africa. Therefore, there's a big need to cut costs in order to run the business more efficiently.

HAI: What's going on with prices? After starting the year with a strong rally, prices have retreated a bit. Is it all due to the decline in gold?

Rhind: There's been some correlation with what's been going on in gold. But platinum and palladium have largely decoupled this year from the action in gold, and to a lesser extent, silver. What's driving platinum and palladium prices are three major things at the moment.

First is the labor situation on the supply side—the labor disputes and the potential restructuring of production in South Africa. The second thing is the performance of the local currency. All of these producers earn their income in South African rand. And the rand has been weakening against the dollar pretty significantly over the last month or so, leading to a lower platinum price in USD.

Finally, as far as platinum is concerned, it's largely about the European diesel market in terms of the demand side of things. [Platinum is used in catalytic converters for diesel engines. Palladium is used for nondiesel.] For palladium, it's about the U.S. and Chinese passenger vehicle markets [nondiesel].

HAI: You referred to the labor negotiations that are going on. How could that play out?

Rhind: There are two major scenarios. The first one would be a significant restructuring of some of the major producers and the mines, translating into significant job losses and mine closures. This would help some of the larger mining companies return to longer-term profitability. The second scenario is some kind of negotiated deal with the government to minimize job losses. The government is heavily involved given that platinum is South Africa's No.1 export.

HAI: What is the time frame in which these negotiations will play out?

Rhind: It's wait-and-see. There are pretty intense negotiations going on now. Whether this will be resolved completely within the space of months or will play out over several years, we just don't know.

HAI: The new physical platinum ETF recently launched in South Africa and we saw some huge buying in that. Is it primarily South African investors who are buying that fund? And can ETF buying in general materially affect supply and demand for platinum?

Rhind: The flows for that particular product have come predominantly from South African investors. There have been some pretty significant flows into that product just within the short space of six weeks. However, in the larger context, investment as a percentage of annual demand for both platinum and palladium is still relatively small compared to gold or silver. The bigger drivers of price are always going to be industrial demand, such as auto sales.

HAI: What is the case for owning platinum as an investment? Is it a global growth story or can it act like a monetary hedge, like gold?

Rhind: There is some similarity to gold in the fact that they're both precious metals. Platinum does have some store-of-value characteristic and it is a jewelry metal like gold. However, the key drivers behind the longer-term investment case for platinum and palladium are more industrial and more based on economic growth. And it is about an environment where pollution standards, or emission standards, are getting tighter around the globe. Car sales will inevitably continue to grow as the economy picks up. And every car that's being produced needs a catalytic converter, and the key component in that catalytic converter is platinum [diesel engine] and/or palladium [nondiesel].

Essentially, it's a play on rising industrial demand, principally from the auto sector, which will rise in step with growth in the global population.