The Hindu Business Line : Platinum-palladium price spread may widen

THE question whether the current price spread between platinum and palladium will change has been engaging the minds of players in the market for some time.

Over the last four weeks or so, the differential has been oscillating between $620-$570 (Rs 27,280-Rs 25,080) an ounce.

The consensus that seems to have emerged is that the current widespread will narrow over time as consumers substitute from platinum to palladium.

Investors have become convinced that the spread between the two metals will now contract significantly. Is the assumption of substitution valid? It is believed that investors were encouraged to enter positions based on a narrowing of the platinum-palladium spread following the announcement made on April 2 by the Belgian producer Umicore that the company has developed a new diesel catalyst "which will at this stage allow the replacement of approximately one quarter of current platinum loadings by palladium."

However, not everyone is willing to buy this argument of substitution. There is belief that the physical fundamentals still greatly favour platinum over palladium, while the price related substitution would take considerable time before it occurs in market significant size.

"We believe that the physical fundamentals of platinum compared to the speculatively driven rally in palladium will see another widening of the platinum-palladium spread," according to Mr Kamal Naqvi, precious metals analyst with Barclays Capital.

According to the expert, in the short term, a widening of the spread can be expected for a number of reasons including that platinum is a genuinely tight market (the only precious metal with high borrowing cost), China continues to buy the metal on dips, demand continues to be robust (despite stories of substitution) and South African mine expansions remain pressured by the strong Rand, while palladium is far more exposed to profit-taking from speculators.

"We expect tight supplies and strong, resilient platinum demand to not only support the metal but to drive prices towards (and possibly beyond) $1,000/oz; while we see palladium as, although having potential towards $350/oz, being extremely vulnerable to the withdrawal of speculative interest," Mr Naqvi said.

On April 23, platinum was quoted at $852/oz and palladium at $272/oz in the European market.