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Industrial precious metals likely to grow

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Nitesh Shah, (pictured) Director – Commodities Strategist at ETF Securities, has commented that demand for platinum, palladium and silver is likely to grow as China’s industrial output has found a base.

 “Silver, platinum and palladium have started to recover this year, rising 14 per cent, 11 per cent and 7 per cent respectively (to 22 March 2016). Part of their recovery reflects their close ties with gold: silver and platinum monthly returns have been 70 per cent and 57 per cent correlated with gold since 1993.
 
“Silver and platinum are heavily used in jewellery and are invested in bar and coin form. Palladium has a much lower correlation to gold (25 per cent since 1993), reflecting the fact that jewellery and bar and coin investments are very small for the metal. Nevertheless, more than half of silver’s and close to 70 per cent of platinum’s use is in industrial applications and automobile components (over 90 per cent for palladium). Industrial output is therefore an important driver of the demand for these metals.
 
“Part of the reason that these precious metals have been falling since 2011 is due to China’s moderating demand as it adjusts to a slower pace of economic growth. China’s demand growth for silver and platinum has fallen in recent years, but remains strong for palladium, which is used heavily in catalytic converters in gasoline powered cars.
 
“All three of these metals have been in a supply deficit in the past three years. The deficit is likely to continue. South Africa, which produces 80 per cent of platinum and close to 40 per cent of palladium habitually has labour and energy security problems. The depreciating South African Rand has insulated its miners from the price weakness of the underlying commodity for some time. However, as the South African Reserve Bank is determined to stamp out inflation by raising interest rates and regaining strength in its currency, miners will no longer be as insulated as they used to be. Miners are likely to continue to pare back on activity.”
 
 Nitesh adds that rising global emissions standards will drive demand for platinum group metals (PGMs) higher.
 
“In 2015, tighter emission standards were rolled out in Europe. In Europe there are more diesel cars than gasoline cars. Diesel cars use higher platinum loadings compared to palladium in their autocatalysts. While autocatalysts are not the primary technology to abate NOx emissions, according to Johnson Matthey, PGMs optimise the process. As a result, in 2015 PGM loadings increased by 7 per cent due to the roll-out of the legislation. Platinum demand in 2016 is likely to increase as a result of the higher loadings in European cars introduced in September 2015.
 
“In 2010, India had rolled out an emission standard that was the equivalent of Euro 4 in 14 states. That is to be enforced nationally by 2017. However, such is the desire to improve air quality that this year India decided to scrap the equivalent to Euro 5 regulation rollout and leapfrog to the equivalent of Euro 6 regulation by 2020. India is thus quickly catching up with its developed country counterparts in emission standards. With emerging market car sales growing rapidly this bodes well for PGMs.
 
 
 
“The US has entered a new phase of tightening emission standards. In California and a number of other “green” states, LEV III regulations will be implemented between 2015 and 2025 model years. Federal Tier 3 will be rolled out between 2017 and 2025. The effect of both of these legislations is that fleet average emissions will be ultimately reduced by 70-80 per cent.”
 
Shah concludes that notwithstanding seasonal fluctuations, global auto sales remain strong – a trend the firm sees continuing as the global economic recovery continues to gather momentum.”

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