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Platinum or Palladium: What is better to invest in?

Madeleine Webster's picture
25.09.2018 - 11:13

Looking at the current platinum and palladium prices, it’s hard to believe that approximately 5 years ago platinum prices were 2 times higher than palladium prices. Indeed, on September 24, 2013 spot platinum price was 1427.8 $/Oz, which was higher by 72% than the price on September 24, 2018 (829.1 $/Oz). As a comparison, spot palladium prices on September 24, 2018 was 1054.3 $/Oz. On the graph below you can see the dynamics of metal prices over the past 5 years. In this article I will try to consider the main factors affecting the prices of metals, as well as to answer the question: «What is better to invest in platinum or palladium?».

Palladium market

The main consumers of palladium (~80% of demand) are automakers, which use metal in autocatalysts for the gasoline vehicles, as well as for the gasoline hybrid vehicles to clean up exhaust fumes. Rising markets of the gasoline and gasoline hybrid cars, against the backdrop of the countries regulation to reduce emissions, have been causing of the palladium market deficit for the last 5 years. It is not hard to understand, that this factor is the key reason of the strong performance of the palladium prices and will be the determining driver of the trend trajectory in the future.

The main global producers of palladium are South Africa & Zimbabwe (47% of total production) and Russia (37% of total production). The remaining portion of the global supply accrues to North America (14%) and other countries (2%).

At the year-end 2017 the African mine production slightly increased by 3% and still stays strong. However, the situation in Africa remains unstable and associated with risks of national turbulence, violent upheavals and clan rivalries, that could lead to stoppage in production and decrease the global palladium supply.

In 2017 the supply of Russian palladium declined by 13% mainly due to Norilsk Nickel’s reconfiguration program. It is expected that the company’s palladium production will stabilize, however it will not be enough to cover current demand.

Will this deficit continue? I think yes. Some support for the palladium deficit will provide the increasing recycling, which showed strong growth in 2016 and in my view should continue its trend in the mid-term. Also Norilsk Nickel’s Global Palladium Fund will play a crucial role in the management of global palladium stocks over the forseeable horizon. The fund will increase the transparency of the global stocks and will try to maintain the deficit on the market, given by Norilsk Nickel’s status of the world’s largest producer of palladium and the importance of palladium in the company’s revenue generation. According to Norilsk Nickel’s interim IFRS financial results for six months ended June 30, 2018, the share of palladium sales in total revenue was 33%, which in monetary terms was $1950 mln.

In summary, against the backdrop of the increase in car sales, as part of the growth of the world economy and tightening emissions standards, palladium demand will remain strong. As a result, rising automakers palladium demand, stable deficit and increasing investor sentiment will support bullish trend of palladium prices.

On the other hand, it could help platinum and open new upside potential. How? Let’s start analyzing the platinum market.

Platinum market

Platinum demand is slightly diversified than palladium and mostly based on autocatalysts for the diesel vehicles (~35% of demand) and jewelry (~30% of demand). Analyzing in depth the structure of the demand, we see that ~15% of autocatalysts demand is accounted for by diesel cars in Europe and ~20% of jewelry demand falls on China. Looking at current platinum market prices, it’s obvious that major growth drivers are losing momentum.

What are the main reasons? First of all it is the loosing of market share by diesel vehicles in Europe. Honestly speaking, I think we are witnesses of the beginning of the end of diesel engines. After German decision to ban diesel vehicles, a lot of European cities (Rome, Paris, London, Madrid, etc) announced that they would ban diesel cars in 2020-2024. Historical note: Germany is the pioneer of the diesel engines… And we see how founding father destroys his invention.

Another negative factor for platinum prices is the declining in the demand from the jewelry producers, especially from the Chinese producers. Consumers’ preference is still based on precious jewels, branded jewelry sold by piece, the opposite of most platinum product on the market. However, it could be slightly offset by growth of Indian platinum jewelry consumption, as well as recovery of the platinum jewelry industry in US and Japan.

More than 80% of global platinum production is accounted for by South Africa and Zimbabwe. The remaining portion of the global production accrues to Russia (12%), North America (2%) and other countries (2%).

At the year-end 2017 the African mine production slightly decreased by 1%, but still stays strong. But, as I mentioned, earlier the business and operating environment in region is fluctuating, so we could expect sharp decline in platinum production.

Platinum: down but not out

And now it is time to return to my assumption that high palladium prices under the conditions of sustained deficit on the market, could provide upward trend for the platinum prices. Simply because it enhances the likelihood of car producers to substitute platinum for palladium in gasoline engines. Taking into account the current global ratio of palladium to platinum use in autocatalysts (2.75 to 1), in case of rising risk for auto producers of scarcity palladium, there is a chance that we will see this substitution.

Current market situation has pushed some companies to investigate the possibility to use platinum in gasoline engines. However, research results showed that it is need to improve technologies, because platinum has worse thermal stability in comparison with palladium. Therefore, I don’t expect that in the medium term platinum will substitute palladium in the automotive industry. Also currently it is difficult to estimate the cost of this technologies and how its use will affect on the margin of the automakers.

Anyway if substitution is postponed indefinitely without any positive information flow for the market, I think that platinum prices could move lower in the short term. In sum, without any technology breakthrough I expect we will see slight increase of the palladium prices over the short term and unimposing dynamics of the platinum prices.

Despite the fact that analysts have more positive view on the platinum prices than me, they forecast continued excess of palladium prices over platinum over the next 5 years:

One drop of poison infects the whole tun of wine

We considered in depth the major factors affecting the prices of palladium and platinum. It was determined that robust demand growth from automotive sector will remain the main driver of the metals’ bullish trend. And despite the internal rivalry of palladium and platinum, everything looks positively. However, the analyses of PGMs (platinum group metal) wouldn’t be full without risk measurement of the electric vehicles’ market penetration.

Why it could become a noteworthy risk for platinum and palladium? Because PGMs are not used in the production of EV (electric vehicles), due to there is no exhaust to catalyze. The producers use such metals as lithium, cobalt, nickel, copper, etc., but not platinum and palladium.

The penetration of electric cars in China is outstripping other countries under the sway of strong government support of the production of zero- and low-emission vehicles. In 2Q 2018 the sales of EVs reached 4% of the total sales of passenger vehicle in China, as a comparison in 2Q 2015 the EVs share was less than 1%. Also electric vehicles reached almost 2% of sales in Europe and 1.5% in North America.

In my opinion this quick growth is likely to continue. Generally, in 4Q the sales of electric cars in the Chinese market are higher. Also beginning in 2019 carmakers will have to sell a specified percentage of ‘New Energy Vehicles’ amid government regulations, which are similar to imposed requirements in California. Carmakers that do not meet the established performance targets, will be obligated to buy credits from competitors. At year-end 2017 the share of China in the global EV market was 47% and I expect that this share will increase to 55% in 2018.

In my view electric vehicles will push out of the market the diesel and gasoline cars, which absolutely will be fatal for palladium and platinum. However, it’s a matter in long-term future, because current EV share and tendencies of development are low on the global scale. But we shouldn’t forget about this factor and keep up with the times.

And finally…

What is better to invest in platinum or palladium? Taking into account the strong palladium demand from gasoline automakers, many countries refusal of diesel engines, sustained palladium deficit in the mid-term, in my view palladium will be more attractive in comparison with platinum.

Also I don’t expect that in the medium term platinum will substitute palladium in the automotive industry. In addition, current EV share and tendencies of development are low on the global scale, therefore I don’t worry about EV market-share gain in the foreseeable future.

Oil Curse: oil addicted countries

Steven A. Powers's picture
25.09.2018 - 10:47

Nowadays oil industry is one of the most important components of the world economy, which exert influence on the development and stability of many countries, financial markets, commodity markets, as well as international relations. Oil is a powerful weapon in the hands of exporting countries, which at the same time could backfire on them. From December 2014 to January 2016 collapse in the price of oil shook the oil-dependent economies. In front of everybody, erstwhile powerful oil nations became poorer, their currencies depreciated and human wellbeing reduced. Now we see the recovery of oil prices. However, how long the largest oil exporters will enjoy bullish trend? And which countries are the most dependent on volatility in oil prices? I’m going to consider these issues in this article.

Oil market: it seems that the bullish trend will over

Starting this year, oil prices has shown upward dynamics, which infused hope into market players that prices will reach at least the levels of 2014. However, I don’t share this positive outlook. My negative view on oil prices is based on expectation of the world economic recession, which will lead to a decrease in oil and oil products consumption.

In spite of the optimistic statistics and estimates, there are more and more signs of the looming crisis. The United States continues to wage a war against the world. Trade wars and sanctions affect more and more economies (especially oil economies), as well as strong strengthening of the USD puts downward pressure on the value of world currencies.

Against the backdrop of the tightening of short-term lending conditions, the oil demand may reduce in the mid-term. The depreciation of national currencies coupled with current higher oil prices, also makes fuel more expensive for consumers. Also there is a growth rate reduction in Europe, Japan, India and China in combo with an increase in inventories in the US, that whip up market tension. Also my negative outlook on the oil prices is confirmed by analysts’ consensus.

The most dependent economies

The top 10 oil exporters account for approximately 70% of world total exports. Surely, depending on the diversification of economy the volatility in crude oil prices to different extents affects the stability of each exporter. In this article I’m going to consider 5 of them (Saudi Arabia, Russia, Kuwait, Nigeria, Kazakhstan), which in my view are characterized by internal or external conflicts, emerging economies, centralization of power in the hands of one person or clan, as well as closed political system. In the future, if you are interested, I will consider the remaining top exporters.

Saudi Arabia

Saudi Arabia is the largest exporter of oil in the world. According to the strategy expounded in the National Transformation Program 2020 and Saudi Vision 2030, the government is planning to reduce the country’s dependence on oil. In this strategy pride of place goes to the transformation of the Public Investment Fund (PIF) into $2 trln sovereign welfare fund, which will be funded by sale of state-owned assets, lands, as well as initial public offering (IPO) of the state-owned oil company Saudi Aramco. However, Saudi Aramco’s IPO is constantly postponed, which gives rise to doubt about the reality of public offering. Anyway, time will show.

The government plans to invest 50% of fund amounts to the foreign assets and hopes that investment yield will reduce the country’s dependence on oil. But I’m skeptical about achieving of this targets. In my view the returns on these investments will be lower than even earnings from oil sales at falling prices in 2014-2017. Therefore, I think that the main driver of Saudi Arabia’s economic growth will remain the crude oil export.

Russia

In my view, Russian economy is one of the most diversified among the oil exporters concerned in this article. However, against the backdrop of the collapse in the price of oil in 2014-2016, Russian rouble demonstrated fatal depreciation against US dollar. In this regard, the government had to support oil companies and banks using the funds of sovereign wealth fund, so I’m not sure about pensions for the Russian future generations…

Surely, besides volatility in oil prices, Russia has a lot of problems, such as sanctions, capital exports, troubled international relations, outflow of foreign investment, as well as social discontents due to immunity of Putin’s inner circle. By the way about Putin’s inner circle… After fair criticism of Gazprom and Rosneft, Sberbank CIB fired the analyst Alex Fak and the head of research Alexandr Kudrin.

According to the OPEC meeting in June, most likely that Russia will increase oil production in the nearest future. Given by higher oil prices in 2018, Russia will show Real GDP growth of 1.8%. But as I noted above, I expect the world economic recession, which will decrease Russian oil export and the growth rate of Russian economy will slowdown.

Kuwait

Like most oil-dependent countries, Kuwait is also planning to reduce reliance on hydrocarbons. The government current plan is based on development of infrastructure projects. But I’m skeptical that government could achieve its goals. First of all, if Kuwait continues to develop large-scale infrastructure projects, the country will need to finance these stimulating measures by funds of sovereign wealth fund, which will be challenging with crash in oil prices. Secondly, on the back of bullish trend of oil prices, I think that Kuwait will postpone the implementation of its strategy. Also oil investment continues to increase, which confirms my assumptions. Therefore oil and oil products will continue to generate more than 80% of country’s export earnings.

According to the OPEC meeting in June, most likely that Kuwait will increase oil production in the nearest future. Given by higher oil prices in 2018, Kuwait will demonstrate Real GDP growth of 1.9%, as well as the economic growth will continue in 2019. However, against the backdrop of the world economic recession, the growth rate of Kuwait’s economy will decrease.

Nigeria

Nigeria is one of the most politically instable oil exporters, due to constant threat of overthrowing a government on the back of social discontents with economic difficulties in the country. In the mid-term I don’t expect any structural reforms to stimulate economy and measures to reduce dependence on oil export, therefore economic turbulence and reliance on volatility in commodity prices will continue. The situation is aggravated by the government concerns about an increase in consumer prices as a result of the implementation of new reforms, that will be disastrous for the current government. In addition, in a politically volatile environment it is nonsense to think that any government plan will be fully implemented.

Current higher oil prices will probably provide the growth of Nigerian economy in 2018. However, this positive effect will not be long and in 2019 we will see a slowdown in economic expansion. It is worth noting that in the current conditions Nigerian companies can’t compete with international producers, due to high cost of capital, poor infrastructure and low-level skills. Country needs a change and I believe that after election in 2019 we will see some positive signs, which will provide the recovery of economy in 2020.

Kazakhstan

By the end of 2017, Kazakhstan was the ten in the list of world largest oil exporters. However, in spite of the country’s wealth of natural resources and diversified economy, the volatility in oil prices has impact on the stability of the economy of Kazakhstan.

The value of Kazakhstan tenge depends on oil prices, as well as on the value of the Russian rouble. For instance, after new US sanctions against Russia on April 6, 2018, the RUB depreciated by 12% against USD and KZT in turn lost about 5% of its value. Broadly speaking, I found a lot of similarities between Russia and Kazakhstan – all-time political leaders, resource-based economies, low social standard of living and wealth of presidents’ inner circles, etc.

I expect that in 2018 rising oil export and higher oil prices will reduce Kazakhstan’s current-account deficit and provide the growth of the county’s economy. However, in subsequent years the situation will be similar to the Russian economy. Against the backdrop of the world economic recession, which will reduce the country’s oil export, we will see the slowdown in Kazakhstan’s economic growth.

Overall conclusions

In spite of current recovery of oil prices, I forecast the fall in oil prices due to expectations of the world economic recession, which will lead to a decrease in oil and oil products consumption.

In my view, there are more and more signs of the looming crisis. The United States continues to wage a war against the world. Trade wars and sanctions affect more and more economies (especially oil economies), as well as strong strengthening of the USD puts downward pressure on the value of world currencies. Surely, the upcoming collapse in the price of oil will shake the oil-dependent economies.

As an example, I considered five oil-dependent countries (Saudi Arabia, Russia, Kuwait, Nigeria, Kazakhstan), which, in my view, are characterized by internal or external conflicts, emerging economies, centralization of power in the hands of one person or clan, as well as closed political system. And each of these countries will continue to suffer from the fall in oil prices, until disposes to disposal of oil curse.

Choose your travel destination as financial Guru

petr.voznenko_2082's picture
25.09.2018 - 09:48

Floating around the Internet you could find a lot of guides how to plan your next vacation, useful travel hacks and tips how to spend the holiday of a lifetime. Of course it could be helpful. But I want to propose alternate approach for choosing your travel destination. Let’s assume that you get wages in United States dollars, have an idea of what factors affect the exchange rates, as well as don’t want to spend plenty of money on vacation. In that case I would like to bring up to speed on how to choose your travel destination taking account of the currency depreciation versus United States dollars. I chose the following countries for your next trip: Argentina, Turkey, Brazil and Russia. So let’s talk about these countries and forecast the trend of their currency exchange rates.

Argentina

Argentine Peso is the leader of the depreciation among the countries I’m recommending for visiting. Over the past year, the peso has lost 54% of its value against the US dollar. And most likely this trend will continue, due to large fiscal and current-account deficits, as well as non-diversified economy of the country.

The economy of Argentina is highly dependent on agro-industry (approximately 11% of GDP). A heavy drought in May-June led to sharp drop in agriculture production, which negatively affected the economy of the country. Of course drought is one-time effect, but this case shows us that the economy of Argentina is still not sufficiently diversified and could face with the similar problems in the future. Anyway I expect further slowdown in economic growth of the country.

Another factor, which in my view will be bearish for the Argentine Peso’s value, is political uncertainty. Large fiscal and current-account deficits, high inflation against the backdrop of catastrophic ARS depreciation, weak investor confidence in stability of the economy of Argentina and appropriate outflow of foreign investments, could weaken the authority of Mr. Macri. The next presidential election will be held in autumn 2019 and I think we will see the bitter power struggle. In addition, IMF, support of which is used by the current government, has bad name in Argentina after country’s profound crisis in 2001-2002. So if something goes wrong, it would be severe problem for Mr. Macri.

According to the analysts estimates in 2018-2019, we will not see the strengthening of the Argentine Peso. During 2018 the USD to ARS exchange rate will be approximately equal to the current levels. In 2019 ARS will depreciate more strongly against the backdrop of the presidential election. And finally in 2020 we will see appreciation of Argentine Peso against US dollar. However, I think that the ARS appreciation in 2020 will depend heavily on election results, so I see potential volatility risk for exchange rate.

Turkey

Over the past year, the Turkish lira has lost 44% of its value against USD. And I expect further depreciation of TRY, due to high level of domestic political instability, increasing regional tensions and decline in foreign investors confidence.

In 2017 Turkish economy showed strong real GDP growth of 7.3% (vs 3.3% in 2016), driven by state support measures, government loan guarantees, government pressure on banks to boost the domestic lending growth, as well as rising export competitiveness. However, in my view in 2018 the growth of Turkish economy will slow down to 3-4%. This forecast is based on the detrimental effect of tax increases, rising political turbulence and social tensions, fatal TRY depreciation, which collectively will exceed the government efforts to rise inward investments.

As for the high trade deficits, in my view it will continue in 2018-2022, given by mentioned Turkish lira devaluation, as well as increasing commodity prices. In the mid-term I expect the growth of the tourist arrivals, however keep in mind that the major risk for the industry is the possibility of the new terrorist attacks.

In my article there was much talk about Turkish political instability. And indeed I think that the political factor will make negative impact on the country’s economy. The unconditional authority of Mr. Erdogan, which is provided by the political persecutions and arrests of possible competitors, will exert downward pressure on the country’s development. Also it stands to mention about Turkey’s deterioration in relations on the international stage. In my view, Turkey looks like as an unstable and unpredictable partner, which could quickly change allies. That’s why I’m not sure that in the medium-term we will see some positive news about improvement of Turkey’s international relations.

According to the analysts estimates in 2018-2019 the USD to TRY exchange rate will be approximately equal to the current levels. Maybe in 2020 we will see appreciation of Turkish lira against US dollar. However, I’m not confident like analysts in this TRY strengthening, so you can boldly plan your trip to Turkey.

Brazil

Brazil is the next country where you can spend your holiday, using my travel guide based on currency depreciation. For the last year the depreciation of Brazilian Real wasn’t so dramatic like Argentine Peso and Turkish lira. Anyway BRL has lost 22% of its value against USD and I see potential for further weakening.

In my view the economy of Brazil will continue to recover from profound crisis in 2015-2016, against the backdrop of the rising commodity prices. However, I don’t expect hasty growth, due to uncertainties around upcoming general elections which will be held in October 2018, as well as strong USD and more severe financing conditions. Therefore I expect the GDP growth of 1.7-2.5% in 2018-2020.

The upcoming general election is the major uncertainty factor for the economy of Brazil. The generality of voters are indignant about the low standards of living, corruption, as well as high crime levels. Key challenge for the next government will be to show possibilities to solve these problems and, in addition, to reach the stable growth of Brazil’s economy, as well as to increase the investor confidence. However, the main candidates for the presidency have different views on the achieving goals. So it will be unpredictable and risky for the Brazilian Real.

According to the analysts estimates in 2018-2020 we will not see the strong strengthening of the Brazilian Real. During 2018 the USD to BRL exchange rate will be slightly lower than the current levels. In 2019-2020 analysts expect that BRL will strengthen by 8% in comparison with the exchange rate in 2018. Honestly speaking, I’m not so positive in my forecast as analysts. I expect that in the mid-term we will see the further depreciation of BRL against USD, due to uncertainties regarding the new government. So it’s time to add Brazil to the must-visit list for 2018-2020.

Russia

Russia is the final destination of my ‘depreciated countries’ guidebook. The most dramatic depreciation of the RUB against the USD occurred in December 2014 to March 2016. For this period the Russian Ruble depreciated almost twice. Therefore, the loss of value of 10% over the past year looks not so frightening. However, I expect further RUB depreciation on the back of new US sanctions and strained international relations.

I expect that Russian economy will continue its growth and will show GDP growth of 1.6-1.8% in 2018-2020, which will be supported by increasing fixed investments and private consumptions. Also, against the backdrop of the higher oil prices, the current-account surplus of Russia increased to the equivalent of 2.2% of GDP in 2017 from 1.9% in 2016. Russia is planning to increase oil production, so I expect Russia’s current-account surplus will continue in 2018-2022 amid the oil prices positive outlook.

At first sight everything looks positive for the Russian economy. However, don’t forget about the sanctions against Russia, which damage country’s economy. I’m sure that Mr. Putin will continue to maintain his position on the international stage. Therefore, in my view, we will see new sanctions against Russia. And it will be regular blow to the value of the Russian Ruble.

According to the analysts estimates in 2018-2020 we will not see the strong strengthening of the Russian Ruble. Maybe in 2020 we will see appreciation of RUB against USD, however, its value will be slightly less than in the beginning of this year. As for me, I’m not so positive in my forecast as analysts and I expect the loss of the Russian ruble will be higher.

It’s time to pack your bags

In this article I told you about my approach in choosing travel destination taking account of the currency depreciation versus United States dollars. I chose the top 4 countries whose currencies have lost the most value against USD over the past year and have the potential to further weaken. The main losers (or leaders of your savings on the trip) are Argentina (54% weakening), Turkey (44% of weakening), Brazil (22% of weakening) and Russia (10% of weakening). And in my view the downward trend for these currencies’ value will continue in 2018-2020. So it’s time to pack your bags and go on your first trip. Have a safe journey!