The Hindu Business Line : Platinum, palladium spread widening

A GENUINELY tight physical market, continuing robust demand and return of speculative interest to the long side have all combined to not only keep platinum prices buoyant, but also widen the spread with palladium, contrary to the expectation of many players.

Around April, many market participants had become convinced that the spread between platinum and palladium would contract markedly, largely due to assumption of substitution between the two metals.

"But that was not to be, simply because physical fundamentals greatly favour platinum over palladium and significant price-related substitution would take considerable time," Mr Kamal Naqvi, precious metals analyst with Barclays Capital, commented. He had argued several months ago that the price spread between the two metals was poised to widen, rather than shrink.

Now, the case for platinum at least holding the $600 spread, and possibly even extending it, over the coming months, actually appears to be getting stronger, according to the expert.

Unlike other precious metals, the physical market for platinum is genuinely tight as is evident from the lease rates which, although down from above 10 per cent (one year) in mid-2003 to 4.7 per cent by end-July 2004, remain several fold higher than that of palladium (0.8 per cent).

Notwithstanding the constrictive fundamentals, speculative length on NYMEX in platinum trended lower from September 2003 until moving to marginally net short in July, for the first time since November 2001. But in recent weeks, the spread between the two metals has started to reassert itself back above $600 an ounce.

"However, we are now seeing a return of speculative interest to the long side as demand as proven resilient (or substitution has been slower) and South African expansions are looking vulnerable," Mr Naqvi pointed out.

In contrast, the net long position in palladium remains significant despite disappointing price performance and the risk of further long liquidation clearly remains.

As for the pace of substitution, the market feedback is that while some substitution has already begun, meaningful changes in terms of major swings in supply and demand numbers for both platinum and palladium will take

considerable time to take effect — probably not until the second half of 2005.