FxWirePro: Directional trades in platinum and palladium on divergence posed by headwinds of South African Rand

The prices of the platinum and palladium have recently diverged considerably, with platinum prices having plummeted while palladium prices have risen. The palladium’s prolonged outperformance is projected and recommending buying palladium on dips against platinum.

Palladium is widely regarded as the most “industrial” metal of the two while platinum is more correlated to gold due to its higher use as jewelry. Platinum is also facing headwinds from a weaker South African rand, which makes it more profitable to produce platinum, and concerns over the health of European diesel demand (platinum is a major component in autocatalysts for diesel engines).

Platinum supply concerns have also been alleviated by the successful conclusion of South African mining wage negotiations. The agreement is for a three-year wage deal, which provides union member employees with above-inflation salary increases throughout the period and thereby eliminates the likelihood of wage-related strikes across the South African PGM industry for the foreseeable future.

We expect palladium to realize large annual deficits over the next two years, moderated to a degree by a rebound in autocatalyst recycling.

To compare, our 2016 forecast deficit for platinum represents just 3.4% of mine supply, while the forecast palladium deficit makes up 20% of mine supply. As a result, we expect palladium prices to outperform platinum prices. The main risk to our palladium price forecasts is to the upside.

Hence, the trade recommendation goes this way: buy dips in palladium spot versus a short platinum spot position.