ETFS’ Harvey: Tight Supply Aid PPLT, PALL

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[This interview previously appeared on HardAssetsInvestor.com and is republished here with permission.]

In 2010, ETF Securities launched the first-and to this day, the only-physically backed palladium and platinum exchange-traded funds. Today ETFS Physical Palladium (NYSE Arca:PALL) and ETFS Physical Platinum (NYSE Arca:PPLT) have $510 million and $801 million, respectively, in assets under management. HAI Managing Editor Drew Voros recently spoke with Tim Harvey, senior vice president of ETF Securities, about both metals and how each have unique supply and demand fundamentals that Harvey says makes the metals each fund owns even more valuable.


Hard Assets Investor:Let's start with the basics. What are platinum group metals?

Tim Harvey: Platinum group metals were first discovered in about 1750. Many of the platinum group metals were-and this is where the name derives from-supposed to be platinum. It was only over later years that people with improved scientific techniques and separation techniques realized that not everything was platinum, that you had other metals in there, like palladium and others.

HAI:What is the difference, in laymen's terms, between platinum and palladium?

Harvey: Palladium is the lightest of all the metals-lightest as in density. So it's something you can mix into an alloy.

HAI:Why should an investor consider platinum and palladium over gold and silver?

Harvey: They're very different metals. Gold is looked upon very much as a financial instrument, as a currency of last resort, and doesn't have that many industrial applications, whereas metals like platinum or palladium are very much industrial metals.

In fact, all of the extracted mine supply is pretty much used on an annual basis. You're looking at a total mine supply of each metal of about 7 million to 7.5 million ounces per year. Gold's mine supply may be about 80 million ounces a year, and silver's nearly 800 million ounces a year. The amount of metal that is available for extraction is far less than what's actually available for silver or for gold. Our platinum and palladium ETFs have allowed investors to take positions in the metals because the ETF itself acts as an above-ground stockpile.

HAI:What are the primary mining regions for platinum and palladium?

Harvey: It's similar for both metals. About 75 percent of all platinum is found in South Africa. Another 12 to 15 percent is found in Russia. Platinum is also found further north in Zimbabwe and there are other trace mines around the world. But the vast majority of the metal-90 to 95 percent-is in southern Africa and Russia. When you're looking at supply of palladium, 45 percent of it comes from Russia and 40 percent comes from South Africa.

HAI:There was just a strike at the Impala mine in South Africa, which is, I believe, the largest producer of platinum and palladium; is that correct?

Harvey: It's the largest producer of platinum. The strike's been resolved for now. The workers are back at work and mine production is getting back to normal. South Africa is obviously much more a political situation, where you have in-fighting within the ruling party-the ANC-and we've just seen [president of the ANC's Youth League] Julius Malema being expelled by the party. He was encouraging workers to continue their strike and to demand better paying conditions.

But, of course, for the South African government, the Rustenburg mine, which is owned by Impala, is a great source of revenue directly and indirectly by taxation, royalty payments and the like. The mine is responsible for about 15 percent of platinum's global supply, and platinum prices rose about 15 to 20 percent during the strike.

HAI:That was also when platinum retook its price from gold, right? There was a kind of flip-flopping back and forth there, wasn't there?

Harvey: Yes; platinum temporarily retook its place as the most expensive of the precious metals, but now gold has passed platinum again. So platinum should outprice gold because the cost of extraction of platinum and palladium is far higher than it is on gold.

HAI:What do you think was the cause for gold to overtake the platinum price? Was it the weakness in platinum or was it the overbuying of gold?

Harvey: It was a little bit of both; weakness in platinum comes from its high correlation to the economic cycle. And when this was happening, gold was outperforming platinum. We were at height of the uncertainty when it came to whether Greece was going to default, and the whole European debt crisis was back in the headlines, and the story is repeating itself.

HAI: In terms of industrial demand, what are the percentages for each metal?

Harvey: About 50 percent of platinum goes straight into the auto industry for catalytic converters. Platinum is used particularly in diesel engines. And then, of course, it's used in the electronics industry as well. Most of the platinum group metals get used for everything from flat-screen TVs to factory technology and everyday things like smartphones and touch screens as well. With palladium, you're looking at about 65 percent of the supply going straight into the auto industry.

HAI: How important is Chinese auto production to the future price of platinum and palladium based on the use of catalytic converters?

Harvey: For platinum, I would argue that it is actually not necessarily essential. But with palladium, you could make a good argument that China is tied far greater to palladium than platinum is. Palladium is used in nondiesel engines, which the Chinese are making for domestic use and export. We're already seeing constraints on supply because the constraints on supply of palladium are already there. Chinese car manufacturing doesn't need to go anywhere near 100 million autos produced per year for it to have an impact on the supply of palladium. At existing levels of Chinese car manufacturing and global car manufacturing, we're already seeing pressure on the palladium price.

HAI: How do your palladium and platinum ETFs capture that?

Harvey: The only assets of the trusts are palladium and platinum. They're stored in London or in Zurich because those are the centers of the global platinum and palladium market for above-ground stock. Our platinum ETF holds about 495,000 ounces of platinum. On the palladium side, the ETF holds 795,000 ounces of palladium stored. That's 10 percent of global supply. We are the single game in town when it comes to physically backed platinum or palladium ETFs.

HAI: Some of that Russian palladium supply is a little bit murky, isn't it?

Harvey: It is, and that's a huge advantage to the ETF, which is now taking over as a swing-supplier from Gokhran, the Russian state depository, where all precious metals and diamonds under the Soviet Union had to be sent. So, Russian miner Norilsk, the world's largest producer of palladium, had to send all of its metals to Gokhran from 1935 - when the mine was first started - until 1996. Norilsk has only been allowed to sell metal directly onto the market since 1996. Prior to '96, everything had to be delivered to Gokran and then Gokran would sell it onto the market.

Last October, an unnamed official in the Ministry of Finance said that Gokhran was going to be dramatically reducing the amount of metal it supplied to the market, and by 2014, it will be a very marginal supplier of palladium. Now, nobody knows what this means, because there's no transparency. However, for the last 40 years, Gokhran has been the swing-supplier of palladium. For instance, last year Gokhran provided 10 percent of platinum's global supply. It has been as high as 15 percent of global supply. And now someone in or close to the Ministry of Finance says Gokhran is not going to be the key swing-supplier going forward. It's all changed. So, you've already got a metal that is in tight supply and the swing-supplier basically is withdrawing from the market.

That's why if China's not building 100 million cars a year, it doesn't actually matter:They're making 20 million already and it's already impacting palladium supply. It is illegal to buy a car anywhere in the world without a catalytic converter. The only metals you can use in catalytic converters are PGMs. The catalytic converter must last the lifetime of the car, which is basically 150,000 miles. You can use industrial metals in catalytic converters, but you have to replace them after 3,000 miles.

So in terms of legislation, auto manufacturers have to use platinum and palladium in catalytic converters. And that's the real key to it. In addition, your iPhone, your television - all these products don't work without PGMs.

Silver is the greatest conductor of electricity known to man. Mix it in with palladium and you get a very strong alloy that you can put into the center of a chip as a solder and also the conductor. So consider that nearly 70 percent of palladium is going into the auto industry and 10 to 15 percent is going straight into the electronics industry. This is where the palladium ETF is potentially going to become the swing-supplier.

HAI:Thanks for the great information and your time, Tim.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: PALL , PPLT

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