Platinum at discount to gold on Detroit: Miners under pressure
Platinum is trading below gold for the first time in almost fifteen years after news of the failure of the Emergency Bill that was aimed to rescue - or at least provide temporary support to - the "Big Three" automakers in the US. Although the passage of the Bill through the Senate was always expected to be troubled, the insuperable hurdle was the requirement to bring remuneration for UAW workers down to similar levels to those paid to non-unionised workers at other plants. All is not lost; the TARP (Troubled Assets Relief Programme) funds could be used to help the industry, although President Bush has so far refused to allow TARP funds to be used for any organisation outside the financial sector. The White House however, possibly significantly, has so far refused to rule it out.The Bill would have provided short term funding of approximately $15 billion, with the possibility of longer-term financing. The companies had originally been looking for a combined total of loans /credit lines of $34 billion. As things stand now, Chrysler and General Motors are seeking $11 billion dollars between them through the recession, while Ford has said that does not need immediate help, but it might need a $9 billion line should conditions deteriorate. The Chief Financial Officer of Chrysler has said that it is nearing its minimal viable cash position and will run into problems with respect to paying bills next year. General Motors has also said that it may not have enough operating cash by year-end.The state of the auto markets has been a primary force behind the horrible slides in the platinum and palladium markets since they reached their peaks in 2007, as - for this year at least, this sector accounts for roughly 57% of global industrial demand for each metal (North American demand this year is likely to take up approximately 8% of world platinum demand and roughly 15% of world palladium demand).The sector is obviously extremely important to the metals and price falls have been exacerbated by the frequency with vehicle production and sales numbers are released. North American figures come through at the start of each month, with Europe mid-month and other figures in between, so the market is subject to a constant drip feed of information that has recently been keeping sentiment under pressure. Platinum peaked at $2,273 on 5th March this year and has since fallen by 54%, while palladium peaked at $582 on the same date and fallen by 70%. This palladium high was not a record; that was $1,090 on 24th July 1999 in the wake of massive overstocking on the part of the US auto industry when it as concerned about supply in the face of an imminent increase in demand. Rhodium’s position is even more worrying. Last year the automotive sector took up roughly 86% of world industrial consumption of rhodium and the price fell by over 90% from its late June peak of $10,050 to the recent low of $950, which is where the bid level remains.All of this begs the question as to whether the markets are oversold, or whether current prices are accurately discounting continued weakness in demand. From a trading standpoint the Exchange Traded Funds are suggesting that platinum at least may be oversold. Interest has started to reappear in the platinum funds, with the London Exchange Traded Commodity adding almost a tonne of platinum at the start of December, raising its holdings by 23% and taking the platinum in the London and Swiss funds to a total of 8.5 tonnes. This though is still a substantial drop from the 15.0 tonnes registered at the start of July. The palladium funds have been more cautious. There has been a process of gradual attrition in the London fund, which has slipped from 7.6 tonnes in early September to 5.3 tonnes now, while the Swiss fund (which holds considerably more than London, the other way round for the platinum funds) has been increasing, although very slowly. Combined holdings are currently just over 20 tonnes.At the speculative level, the net speculative platinum position on NYMEX has been oscillating between 12 tonnes and 14 tonnes since late September. Prior to that point the position had fallen sharply, from 19 tonnes in May to four tonnes in mid-August and much of the decline came from long liquidation rather than increased shorts, so there is a case for saying that there are few loose-handed holders left on the NYMEX, at any rate; on the other hand the short position is not over-heavy either. Obviously NYMEX is centrally-cleared and for every open position there is an opposite position so these speculative numbers are used as a guide to sentiment rather than measuring the existence or otherwise of an "overhang". The net palladium position is also middle-of-the-road. In July it was as large as 33 tonnes, before slumping to 12 tonnes in early September then increasing again. For the past few weeks it has been bouncing between 20 and 25 tonnes with no clear direction. Long and short positions have both been variable, suggesting continued confusion.These markets are clearly at something of an impasse and if these prices are sustained for a long period of time then the mining industry will come under even more pressure and ultimately the price discovery mechanism will generate a bounce as supply falls. This is a long term prognosis, however. For the shorter term, if the US auto industry fails then everything will come under pressure, not just the PGMs. If it pulls through, and averts an even deeper recession than the markets are currently expecting, then there will come a point next year where not only will these metals start to recover, but they may well put in a surpassingly strong relative performance on the back of the sharp falls of this year.