Lots of Luster

Features - Nonferrous

Materials flow as precious metals markets nudge all-time highs.

December 29, 2009

Tough times run up precious metals prices and bring materials out of nooks and crannies. The current crunch is no exception. The housing market is dead. The dollar is weaker than any time in recent memory. Business is slow almost everywhere. As a result, prices of gold, silver and PGMs (platinum group metals) are up. For recyclers who make a living on the spread between their buy and sell prices, things are fairly comfortable right now. Materials are flowing. Even the PGM area, where dismal car sales generally mean fewer vehicles scrapped, has a bright lining in the form of “Cash for Clunkers.”

“For 2010, we expect to see some improvements in recycled amounts of PGMs as prices rise to their highest values since the fourth quarter of 2008, encouraging increased collection of salvage converters,” predicts Ashok Kumar, director at A-1 Specialized Services, Croydon, Pa. The company is a large buyer of catalytic converters.

“Much of the material recently scrapped under the U.S. Cash for Clunkers program has already begun to flow to recyclers,” Kumar says. As a result, he projects solid improvements in recycling totals in 2010, as firming prices and global economic recovery support greater collections.

“With an increase of palladium scrap from Europe, especially in the second half of 2009, recycled palladium could see increases of some 13 percent back to near 2008 levels of 1.1 million ounces. Platinum could post more modest gains in 2010 over last year, perhaps up 10 percent to 820,000 ounces, while rhodium could rise to 195,000 ounces, or 11 percent,” Kumar says.

Johnson Matthey, a specialty chemicals company based in the U.K., says auto catalyst demand will close 2009 off by 33 percent, or below 2.5 million ounces, in light of cuts in vehicle production in most parts of the world.
Worldwide, 2009 finished with a platinum surplus of 140,000 ounces, according to Johnson Matthey, which occurred in the face of a demand decrease of about 4.4 percent to 5.92 million ounces.

Despite the added contribution from various scrappage programs worldwide, Kumar says his earlier estimate of a 15 percent decline for auto cats in 2009 may actually be greater. “Reports from other major consolidators suggest possible losses of as much as 40 to 50 percent for some,” he says. This greatly exceeds the estimate from Johnson Matthey.

A-1 estimates total PGMs from recycled auto cats in calendar 2009 could be 18 to 22 percent lower, with likely improvements recorded in the latter months of the year and anticipated for 2010.

Platinum supplies are forecast to climb by 110,000 ounces to just above 6 million ounces. That 2 percent increase comes in the face of soft demand. This is despite a decline in basic mine production.

About 655,000 extra ounces of palladium were on the market as 2009 closed, despite a drop in supplies of 1.8 percent to 7.2 million ounces. Again, less demand for catalysts is depressing consumption as is the fall in industrial and chemical industry demand. Catalyst demand ended 2009 off by about 12.7 percent at 3.9 million ounces.

The low price of palladium—in the $300- to $400-per-ounce range—will boost demand.

Kumar notes that prices of commodities have risen steadily throughout the past year in reaction to a consistent weakening of the U.S. dollar and a modest accumulation of fresh stocks as the worst recession in decades enters a period of recovery, albeit with much apprehension. “Commodities in general have outperformed many other financial investments throughout 2009 as the availability of cheap money flowing from an assortment of global stimulus packages may have fueled an extended period of ‘excessive risk-taking’ as recently expressed by a U.S. Federal Reserve official,” he says.

The result: Platinum rose to a cyclical high of $1,480 per ounce as the dollar remained weak, hovering around the $1.50-per-euro level. That helped raise gold to a record $1,200 per ounce in early December.

“Investment demand still appears to be the price driver in the metals markets,” Kumar says. For platinum, exchange-traded-fund (ETF) holdings of physical metal have risen to a total of more than 600,000 ounces as of the end of October. “The amount of physical platinum held in London vaults to back investor purchases of ETF securities has doubled since the start of January 2009, when stocks totaled only 307,930 ounces,” he says.

Additionally, speculative positions for platinum on New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM) now total 1.5 million ounces.  

The old rule of thumb used to be that a pound of silver bought an ounce of gold. That 16:1 price ratio has gone haywire in recent trading.

Even though silver jumped 75 percent since the start of 2009—to the $19 level in December from $10.79 in January 2009—gold did even better. Gold hit record levels in late November, trading around $1,140, then hit $1,200 in early December.

“We saw a lot of product at $10 to $15; $15 was a threshold,” says Aaron Batelic, vice president of Gemark Corp., a precious metals processor in Bluefield, W.Va. While the silver that came in was lower quality, sellers sought to recycle it all.

“The higher silver price enabled customers to send product in and get a payable rather than a bill,” Batelic says.
He says he thinks silver has more price growth potential than gold. “Silver is undervalued; gold is overvalued,” he says.

“I expect we’ll see a steady incline but nothing outrageous,” says Bill Rockett, vice president of M&K Recovery Group, based in North Andover, Mass. The high prices of gold and silver have brought material onto the market.
“Markets are hot due to people paying attention to the prices,” Rockett says. “I expect more optimism and more attention will be paid to gold and silver.”

Rockett says he expects the two metals to stay around the same price levels they were at year’s end. “They might dip a bit—remember, those are all-time highs.”

Despite the record gold price, he does not see manufacturing being affected. Silver consumption, however, is heavily tied to actual use. Every time you see someone using a digital camera, you get reminded where the demand for silver has gone. In today’s economy, the other mainstay of industrial silver consumption, electronics equipment, has softened and does not show much sign of any quick rebound.

The situation in California for Ken Taggart, CEO of ECS Refining, Santa Clara, Calif., is a bit different. The state banned all consumer electronics from landfills so they either go to Asia or are dismantled in state. “Higher precious metal prices only make the material more valuable,” Taggart says. Higher prices do not necessarily result in more material.

“2010 will bring some recovery in automotive and industrial demand for platinum,” Johnson Matthey says. “Supplies are not likely to grow to the same extent and the market could move into a modest deficit.” This would be good news for platinum prices.

Johnson Matthey projects platinum will trade between $1,280 and $1,550 per ounce during the first half of 2010.

This assumes a continuation of the weak dollar and strong gold prices. It was trading at $1,486 in early December.
If the dollar stays flat and gold demand stays high, platinum could nudge the top end. But, if the dollar should get stronger or the price of gold should fall, platinum likely would stay at or below $1,300.

“It is easy to argue that platinum may be set for a correction, given that the price has risen $250 an ounce, or more than 20 percent, in the past quarter alone,” Kumar says. “But with speculative investors seemingly intent on raising gold above the $1,200 mark, platinum could certainly breach $1,500 an ounce in the short term.”

However, he says any short-term strengthening of the dollar, particularly in reaction to talk of a reversal in current liquidity policies, could adversely affect commodities, and platinum at some point could re-trace its recent gains back to test support at $1,350 or even overshoot down to $1,250 per ounce, before resuming its longer-term upward trend.

Palladium should trade between $290 and $390, according to Johnson Matthey economists. With mine production soft, sale of the rest of Russia’s state stocks and demand in Europe for better pollution controls on diesel engines, the price could be at the upper end of that range by June. A strong dollar or a serious drop in gold and platinum would push the trading range down to the low $300s or less.

Kumar cautions that, should palladium sustain its recent move above the $375 level and continue to firm toward $400, significant additional supply of the metal could come to market, which could dampen further price increases. 

The author is a contributing editor to Recycling Today based in Cleveland. He can be contacted at curt@curtharler.com.