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Metal scarcity tough for ETF backers Posted: Thu, 12 Jul 2007 [miningmx.com] -- THE LAUNCH OF TWO platinum exchange-traded funds (ETFs) provoked an extraordinary vocal response from metal producers earlier this year that have declined to sell metal into the product. The argument is that ETFs constrain a tight market and introduce a level of volatility that makes production difficult to plan. But while some have argued that the “speculative element” is driving up platinum prices just like it has gold, Daniel Sacks, a portfolio manager at Investec Commodity Fund, says the platinum market is just too tight for the ETF to currently exert too much pressure. “Just about every ounce of platinum produced each year is delivered to a jeweller or autocatalyst manufacturer at some point,” says Sachs. “It’s not like gold, where you have those vast quantities sitting in vaults around the world.” The platinum market is about a 10th of the gold market. Platinum is also the classic “famine metal” – with 80% of production concentrated in South Africa. Availability of the metal is key to the ETF backers, of which one is the Swiss Cantonal Bank. Interestingly, most platinum ETFs are really platinum group metal (PGM) ETFs, with significant backing from palladium and rhodium, say analysts. Conversely, the delicately balanced platinum market makes the ETF an attractive proposition. That’s because a diversion of stocks to vaults in Switzerland is likely to further disrupt the platinum market. According to JP Morgan, platinum demand increased to 7,020 million oz, with supply of 7,047 million oz in 2006. It expects demand to again overshoot supply this year, with total platinum demand for 2007 estimated to top 7,517 million oz but supply falling short at 7,296 million oz. If platinum-backed ETFs manage to suck any more platinum out of the market it could send its price upwards. “If it ever gets to the size of the gold ETF I don’t think the market, as it stands at the moment, could handle it,” says Sacks. There are signs of strain in other parts of the PGM market as well. At $5.950/oz, rhodium is the pricey component in the numerous manufacturing processes it’s used in. As such, demand for the metal is far lower than its more illustrious cousins platinum and palladium. Rhodium is used as an alloying agent to harden platinum and palladium, with the alloys used in furnace windings, bushings for glass fibre production, thermocouple elements, electrodes for aircraft spark plugs and laboratory crucibles. But the big demand driver for rhodium is believed to be the emergence of the flat screen television and computer screen as a fashion accessory. However, what’s important is that rhodium is used as a mould to make the screens rather than a direct input into their manufacture. “More flat screen units sold, therefore, doesn’t result in more rhodium sold,” says Daniel Sachs, Investec Commodity Fund portfolio manager. “However, the metal has still benefited as the manufacturing levels of such screens has increased.” Rhodium also plays a minor role in so-called three-way autocatalysts, which use a loading of platinum, palladium and rhodium. However, rhodium is very much the poorer cousin in the relationship and doesn’t enjoy massive levels of support from autocatalyst manufactures. As such, Sacks says he’s unwilling to hazard a guess as to where the metal’s price could be heading. “Rhodium is just such a small market and too open to manipulation to say where the price is going.” Click Here to subscribe to our daily newsletter
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