White Mischief

Liquidity

Welcome to the State of Anorexia

A $40 move on one 8000 oz, bid during a palladium London Fix last summer stretched the concept of market slippage' to breaking point. Whipsaws of $10 roughly over, 1000 oz traded in December questioned the very concept of a 'market'. One day in mid-December palladium pendulummed in a range almost as high as its 1996 price level ($120). Anyone for spot trading? Quoting pgm forwards? Brigadier Calvert, perhaps? In Q4 2000 palladium's rise ($225), was the equivalent of 85% of the gold price. Strange but true, however, pgm lease rates and daily volatility (excluding intra-day white-knuckle ride) an: currently as low as they have been in 4-5 years - perhaps the low volatility is an indication or a tendency to 'buy' rather than 'borrow' on dips.

A change in one oil company's platinum leasing policy here, a quote of the day from Russia there - less than butterfly wings were needed to wreak havoc in pgm during 2000. Unsurprisingly, spreads - especially in palladium - have blown out. They are now redolent of a cardiograph charting the impact of 5000 volts applied to one of a patient 's more delicate parts. In more ways than one, exchanges have become terminal markets.

Speculators

Platinum Ripe for a Squeeze, But Also Forbidden Fruit

Judging by the disappearance of volume on futures exchanges, not much of recent price gymnastics can be pinned on speculators. OTC markets barely exist in pgm. The InterContinental Exchange has hopes, but has set no date to take pgm business).

True, speculators with sufficient protective clothing - remember,' pgm options' is almost a contradiction in terms - have consistently leaned to the long side of platinum. But positions are much lower than they were at the start of the 15-month long upward trend. Profits rather than new positions have been taken.

In palladium, the TOCOM general public were forcibly ejected from their three-year losing net short positions in February 2000, when the exchange froze contracts for the year. In August, NYMEX raised palladium margins to over $160,000 per contract. Volumes on both exchanges have challenged measurement since.

There is irony as well as sadness in this epitaph of exchange activity. For Tiger Management's meticulously crafted long position in palladium from 1996 was partly ­inspired by the expectation that Russian stockpiles would be exhausted. This does not appear imminent, but it is a less distant prospect now than it was 1996. Yet few funds would touch the hot potato palladium has become.

In platinum, a consensus is emerging that Russian inventory is now near depletion, and there are many other demand-supply considerations nagging a market ripe for a speculative squeeze. Yet through the barbed wire of desolate spot, forward and options, a platinum position of meaningful size looks like forbidden fruit.

Official Longs

The Russians Are Coming, Are Not Coming, Are Coming ...

Dorothy De Rothschild believed that "the really decent individual only appeared in the newspapers on two occasions - birth and death". Her credo does not yet appear to have been widely disseminated in Russia, single-source or official inventory and the ultimate keeper of the keys to pgm liquidity. So frequent and/or contradictory are Russian 'appearances' that cynicism has grown among newswire watchers. (In November the head of the state reserve, Valery Rudakov, insisted that Gokhran would not export pgm in 2001 because the budget was in fine shape. Expect a qualification if oil prices and tax revenues tumble?)

The vacuum created by this state secret has been filled to overflowing by western guesses of Russia's reserves. (And Russian alluvial prospectors blaming their stock building on the 25% haircut taken by Gokhran on their metal sales) . Johnson Matthey estimate that 30% and 60% of Russian platinum and palladium sales in the last five years were from stocks. The mean of a very small distribution of opinion at the World Platinum Congress in Johannesburg last November was that some three years ' worth of palladium remained, hut that the platinum cupboard "as almost bare, Even this informed confusion begs the question of where most of those stocks (300,500 tonnes?) might be. One implication or an accumulation of net trade inflows into Switzerland is that, for palladium at least, the metal is not loco Moscow, but is rather entangled in some collateralised arrangement with western counterparts. (The chart assumes first releases of Swiss customs data are accurate)

Movements in Swiss net trade in platinum corroborate the 'bottom of the barrel' thesis and help explain why lease rates have been higher than those in palladium.

Buffer stock managers - be they in diamonds, gold, rubber, coffee - have responsibility for orderly markets thrust upon them. Before the next good delivery bar of criticism is hurled Russia-wards for abrogating this 'responsibility' , the fact - according to Johnson Matthey - that Russian platinum sales movements have offset those of South Africa in 15 or the last 25 years should at least be counted in their favour. But not too publicly, please. Asked at the World Platinum Congress whether there should be strategic discussions at government level on pgm supply accommodation' with Russia, the South African mines minister replied: "It will be put on the agenda". Almost nothing would reverse more quickly the support of governments for pgm (via emissions legislation) than the aroma of a cartel.

Private Longs 1 - PGM Miners

Digging Deeper, But Probably Not Fast Enough

To paraphrase George Bush senior: 'read my contracts'. Stillwater Mining's recently announced revision and extension of the 'caps and collars' on part or its PGM output reveals that end users are ready to pay very clearly for future assurances of supply - well above what notional (backwardated) forward curves might imply.

This is partly because Russia may not have a monopoly on supply-side risk. South Africa's dominant platinum producers, Angloplats and Implats, have expansive hopes, targeting output increases or 50% (1.8 million oz) and 33% (0.4 million oz) respectively by the mid-2000s. But this is from a cold start - many years focused on reducing the costs of producing more or less the same amount of metal. It may be geologically-challenged - most expansions are in the egregiously unfriendly UG2 (rather than the more accommodating Merensky) reef. And it could be politically corrected - between them 'black economic empowerment' and the legal minefield of a new mineral law may distract management from the knitting, or digging. All against a background where what international speculative interest remains might not know its Anglo plats from its Zimbabwe.

Private Longs II - Physical Buyers

Cyclically-Challenged, But Legally Bound, or Upwardly-Mobile?

What is wrong with this picture? From the point of view of General Motors, almost everything. Over the last couple of years, their stock price has performed like gold equity (i.e. not). Meanwhile, the Jo'burg platinum stock index (converted to dollars) has tripled. For some time there has been only one form or cred it cheaper than gold - multi-year, zero-cost incentive schemes by GM and other car companies which have helped extend the US car boom precariously, into an area with which only Warner Brothers' Wily Coyote is familiar -beyond the edge of a canyon. Beep, beep.

GM is not waiting for cyclical gravity to lower its palladium demand. In mid­December it put nesh on bones rattled repeatedly earlier in the year by announcing it would use a new palladium-lite catalyst developed by Degussa from 2002. To what extent might palladium demand be impacted? GM accounts for 17% of global car use of palladium. About 65% of its usage is in North America, and the new gizmo will save around 50% palladium on one-third of that demand – so this retooling would thriftless than 100,000 oz from world car demand, about 2%. But this will not be GM's final word. And other car companies -including Nissan - are joining the convoy economising palladium use. A U-bend in the apparent upward-sloping demand curve for car company palladium demand does not seem to be just around the corner, however.

In the short term, Ford's wrestling with a tyre and SUV recall controversy may cause all metal loadings in all parts of the car to err towards the generous. In the longer term, even as sales explore the cyclical canyon, it is clear that car companies have bought a one-way ticket on the pgm-fired environmental bandwagon. The philosophy of William Clay Ford Jr, for example, more or less updates that of his grandfather: 'any colour you like, so long as it's green.' Mr Ford Jr sees fuel cells (two platinum electrodes in a bucket, converting fossil fuel hydrogen and oxygen into energy plus innocuous steam) replacing the internal combustion engine. Out of the palladium frying pan, into the platinum fire? And a (cycle-proof?) turn from 'just-in-time' to 'just-in-case' platinum inventory planning?

Consequently, the main cyclical hope for cooling palladium demand may be the chip hitting the fan: a sharp fall in electronic use foreshadowed by weekly downgrades of technology company earnings expectations. In platinum, two demand risks might allow miners to play catch up a while: Japan - where western economists perennially predict a catastrophic end game to unsustainable public debt dynamics; and China - where the platinum jewellery chain has been reminded that taxes are indeed one of the only two certain things in life. China's spectacular growth in platinum demand from a zero base in 1992 is widely understood. Less well known is that, since 1996, Chinese growth has more than accounted for the entire increase in platinum demand (offsetting in particularly increased auto catalyst recycling and generally poor investment, according to Johnson Matthey data). When/if China sneezes, platinum demand now catches a cold.

The Chines authorities' Q4 crack clown on platinum imports evading VAT (17%) and sales tax (5% in practice) - partly induced by a sticky official retail selling price squeezing margins - has put local manufacturer demand on hold. Some local jewellers are switching to white gold to fulfil customers' fashionable craze for white metal, Pipeline stocks were thin, however, so the risk of panic disposal to avoid tax detection is small. At a platinum market price of $650, if all VAT and sales tax were paid, jewellery margins would disappear unless the retail price were increased. Coincidentally (?) platinum prices in January peaked just below $650.