We will not discount the potential for further significant declines in platinum and palladium, especially given a strengthening dollar and renewed recession concerns in the US. However, we suspect a significant amount of selling has been the result of fears that China’s infection bulge is derailing the world’s most important vehicle market. Palladium began a five-month, $935 decline (40%) shortly after an explosion in Chinese infections began last September. However, a sharp jump in traffic congestion in 15 major cities in China suggests their economy is well on its way to recovery. Talk over the last several quarters that platinum would steal market share from high-priced palladium has allowed platinum to narrow its gap with palladium from as much as $1400 to $526.
Even though classic supply and demand fundamentals appear more supportive of palladium than platinum, platinum could face significant supply disruptions from falling South African production. This could attract speculative buying, especially if Chinese economic headlines continue to flow positive. So far in 2023, ETF holdings have increased 1.9% for platinum and 4.1% for palladium. The potential for improving industrial, investment, and jewelry demand presents an upbeat view for both markets.
The most recent Commitments of Traders report showed the spec and fund position in palladium had shifted to moderately short by January 24. Given the selloff since then, the net short may have reached a new record by the time it put in a low on February 15. Platinum was still holding a significant net long as of January 24 but was in the process of turning lower. With prices having fallen by $322 since that data was collected, we expect that the spec and fund net long has plummeted as well. (The COT data has been delayed for three weeks because of problems collecting the data. The CFTC has not announced a date when reports will resume.)
Our primary interest in platinum is the possibility that South African production will continues to decline due to trouble at the national electricity company, Eskom. Severe power disruptions in South Africa are not a recent development, and the CEO of Implats has warned that there would be significant losses in production unless the utility is overhauled. There are reports that there were 200 days of power outages in 2022, and the disruptions have recently caused trouble for food makers. This puts the crisis front-and-center. The utility already faces a massive debt load, and engineers are warning that the grid could collapse.
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