CPM’s Jeffrey Christian on platinum-palladium price reversal

Jeffrey Christian is the managing partner of CPM Group, a commodities research and management, consulting and financial advisory firm in New York. He founded the company in 1986, spinning off the Commodities Research Group from Goldman, Sachs & Co., and its commodities trading arm, J. Aron & Company. Christian is an expert on precious metal markets and took time to speak with The Northern Miner about his outlook for platinum group metals and silver.

The Northern Miner: Palladium prices have been rising for nearly three straight years and are now at a premium to platinum, a condition that CPM Group said in a recent research note has only existed once before on any sustained basis, and that was in 2000–2001. What factors are at play here?

Jeffrey Christian: Several trends are coming together. First, the palladium market is growing tighter. Contrary to marketing hype, palladium supply has been in surplus to fabrication demand for most of the time since around 2001. The surplus has dwindled enormously, however, and over the past six years the balance between total newly refined supply entering the market and fabrication demand has been close to flat.

A real deficit should be expected to open. Rising auto demand is a major factor there. So the first trend is tighter market balances. The second is a lot of investor buying, in futures as well as physical, based on the supposition that palladium markets are even tighter than they are, and that the shift from diesel to gasoline will boost palladium demand more, at the expense of platinum. The third factor is tightness and shortages of bars registered against Nymex futures contracts, at a time of a sharp increase in investor long positions in the Nymex palladium futures contract.

TNM: How has the perception that the world is moving to electric vehicles (EVs) impacted the two metals? Both are used in catalytic converters in diesel-powered and gasoline-powered vehicles to reduce pollution.

JC: Both metals have suffered from this concept that we’re moving away from diesel-powered and gasoline-powered vehicles. Within that context, you also have a shift away from diesel-powered vehicles to gasoline-powered vehicles, and in that shift, catalytic converters in diesel-powered vehicles are platinum-intense and catalytic converters in gasoline-powered vehicles are palladium-intense. So if you see diesel vehicles losing market share to gasoline-powered vehicles, then that means you’ll be using more palladium. It’s one of the reasons why the price of palladium has gone up. Investors are looking at the shift away from diesel, and that means you’ll need more palladium.

TNM: Do you share the doom and gloom of some people in the industry that demand for both palladium and platinum will wane as the world moves towards EVs?

JC: If you go back a year ago, observers were thinking that by 2040, maybe 35% of all new cars sold would be EVs. And over the ensuing 12 to 15 months, there’s been an acceleration of that expectation. But the move towards EV will be relatively slow. You’ve had the governments of France, England, China and California talking about mandating an acceleration in the move away from diesel- and gasoline-powered vehicles. But there’s only so much legislation can do, because the technology and infrastructure may not be there.

To put it into perspective, in the 1970s, California introduced regulations that said that by the late 1980s or early 1990s, 5% of all cars sold in California had to be zero-emission vehicles. And the auto industry said: ‘We can’t do that because the technology and the market for zero-emission vehicles — primarily electric vehicles — is just not there, and you can mandate that 5% of the cars we sell must be EVs, but you can’t mandate that people buy them.’ They also said that it put them in a terrible position and if no one wants to buy EVs, then ‘We will have to move our dealerships to Nevada.’ The zero-emission vehicle standards in California are still on the books, but they’ve never been imposed because they are unworkable.

This year you’ve seen any number of governments — the U.K., France, China — issuing mandates that by 2040 they don’t want diesel vehicles or gasoline vehicles sold. The Chinese recently came out with the target that by 2019, 10% of car sales should be low-emission vehicles. You can make those rules but if the market isn’t there, you can’t impose those rules.

What has happened in the PGM market is that investors have listened to all of this and believe that we are moving to EVs, and they are acting as though this is going to happen tomorrow. But that’s not going to happen. The market for EVs is not there, the technology is not there. The electricity to charge that many EVs is not there. So if the governments of the world try to impose a rapid transition to EVs or some sort of low-emission vehicle, or non-petroleum-powered vehicle, the market and the auto industry are simply not there to meet those mandates. But that doesn’t stop investors listening to headlines saying platinum and palladium are dead. That’s why the perception of palladium and platinum has suffered. We are moving away from gasoline-powered cars, but it’s going to be a very long transition.

TNM: What about the supply fundamentals for palladium? The platinum mines in South Africa where palladium is produced as a by-product are getting deeper and more expensive to mine.

JC: Palladium has been in surplus for most of the last couple of decades. The surplus has contracted in that time and is getting smaller, and we will move to a deficit. But we don’t see the market having been in deficit for many years since 2001. In fact we have seen the palladium market becoming more bullish over the last five or six years as the surplus we saw in the previous decade disappears and we move towards a deficit market. With the shift away from platinum to palladium in the auto market, you also have tightness in palladium contracts on the Mercantile Exchange, where the amount of metal stored has shrunk, so that has put upward pressure on palladium this year.

TNM: Can we zero in on palladium price forecasts?

JC: Palladium is up by 34% on average through August of this year, and [earlier this month] it was US$930 per ounce. The low last year was US$470 per oz., so it has almost doubled year-to-date. It did get as high as US$1,080 per oz. in 2001, but it was only at that level for a brief time. We are looking at a 40% increase on average this year and a 5% increase next year. We do see prices staying high.

Looking ahead, we don’t see palladium necessarily rising as sharply as it has this year, but we don’t see it falling back in the short-term, either. Longer term we are far more bullish. While the investment market for palladium seems to be anticipating a rapid transition in the auto sector to some sort of future electric mode of power, our view is that that transition is going to take several decades, and over the interim, there are going to be continued cost pressures on South African platinum and palladium miners, which will cause a contraction in supply. So longer term, palladium prices will rise sharply, because the platinum mining industry will be constrained on supplying palladium before the auto industry makes a wholesale move away from gasoline-powered vehicles.

A drill site at Wellgreen Platinum’s namesake PGM-nickel project in the Yukon. Credit: Wellgreen Platinum.

TNM: What is your outlook for platinum?

JC: Platinum prices have fallen but on a longer-term basis, we think the same economics that apply to palladium will apply to platinum. On a short-term basis, the decline in platinum prices is now factored into the market, and platinum prices won’t fall much more from where they are now over the next few years because they have already fallen.

The average price of platinum this year through August is off by about 4% at US$961 per ounce. Today it’s about US$915 per ounce. The average annual price has fallen every year since 2011, when it hit US$1,723 per ounce. You will see the price bottoming out over the next couple of quarters, but we think the price will stay at around US$940 per oz. over the next year or two.

TNM: Do you expect a supply crunch materializing in South Africa, where PGM mines are becoming deeper and more expensive to operate every year?

JC: Yes, you will see tighter supply. Platinum production in South Africa has fallen about 20% over the last decade, and the expectation is that over the next decade we’ll see another 10–15% decline in production. Supply constraints in South Africa will come sooner than the move away from petroleum-powered vehicles, so you could easily see a period of stronger platinum prices before the shift to EVs happens.

TNM: What’s your view on silver?

JC: The silver market is probably in worse shape than platinum and palladium. Silver splits its personality between being a financial asset like gold and an industrial metal. To some extent the investment side is hurting, so if you look at silver sales, they are off 46% in terms of Silver Eagle sales this year through August. We’ve seen a big decline in investment demand for silver and you’re seeing a relatively modest decrease in fabrication demand. That combination puts some downward pressure on prices.

Right now gold and silver are suffering from weak investment demand, especially in North America and Europe. Investors are focusing on equities. That will change, at some point.

As someone said [earlier], the only reason to be bearish on stocks at present is that there are no more reasons to be bearish on stocks. The reverse is true for gold and silver. Investors have a lot of concerns about the state of the economy, and the world’s political situations, but none of those things have actually hurt the economy. For all the concern, and all the complaining about countries like North Korea, in reality, the economy in the U.S., China and Europe has been better than a lot of people thought, so that in that kind of environment people are shifting away from gold and silver towards the dollar and towards stocks. That could shift or change at some point, but at this point there are any number of people who are waiting for that to change. It doesn’t mean that change won’t come, but it’s not clear what the political or economic catalysts will be to cause people to lighten up on their stock exposure and increase their gold and silver exposure.

TNM: Where do you see the silver price going from here?

JC: Our expectation is that the silver price will stay above US$16 per ounce. On a short-term basis, the silver price is up about 1% this year, or it has averaged US$17.30 per oz., and we think it will go up by about 6% next year, or average US$18.40 per ounce. We don’t see it running away sharply, but on a longer-term basis we do see political and economic problems coming home to roost, and so we see silver prices rising to between US$22 and US$24 per ounce.