Market Basics » Platinum Group Metals
PGM elements
Platinum, palladium, iridium, rhodium, ruthenium and osmium.
Platinum and palladium are the two best known metals of the six platinum group metals (PGMs).
Platinum and palladium have the greatest economic importance and are found in the largest quantities. The other four-iridium, rhodium, ruthenium and osmium-are produced only as co-products of platinum and palladium.
Trading Unit
Pricing is listed as one fine troy ounce generally quoted in American dollars. Nymex futures contracts trade in 50-ounce units.
Units for delivery
The unit of trade in London and Zurich is the troy ounce, whose conversion between grams is: 1,000 grams is equivalent to 32.1507465 troy ounces, and one troy ounce is equivalent to 31.1034768 grams.
A London/Zurich Good Delivery plate or ingot is acceptable for delivery in settlement of a transaction on the OTC market.
Typically referred to as Good Delivery, a plate or ingot must contain between 32 and 192 troy ounces of platinum with a minimum fineness (or purity) of 999.5 parts per 1,000 (99.95%), be of good appearance, and be easy to handle and stack. The platinum content of a platinum plate or ingot is calculated by multiplying the gross weight (expressed in units of 0.025 troy ounces) by the fineness of the plate or ingot.
A Good Delivery plate or ingot must also bear the stamp of one of the melters and assayers who are on the LPPM approved list. Unless otherwise specified, the platinum spot price always refers to that of Good Delivery Standards. Business is generally conducted over the phone and through electronic dealing systems.
Pricing mechanisms
Fixings, Spot, Futures contracts
Avenues of trade
The global trade in PGMs consists of Over-the-Counter (OTC) transactions in spot, forwards, and options and other derivatives, together with exchange-traded futures and options.
Global Over-The-Counter Market
The OTC market trades on a 24-hour per day continuous basis and accounts for most global platinum trading.
Market makers, as well as others in the OTC market, trade with each other and with their clients on a principal-to-principal basis. All risks and issues of credit are between the parties directly involved in the transaction. Market makers include the market-making members of the LPPM, the trade association that acts as the coordinator for activities conducted on behalf of its members and other participants in the LPPM. The four market-making members of the LPPM are: J.Aron & Company (a division of Goldman Sachs International), Engelhard Metals Limited, HSBC Bank USA, N.A. (through its London branch), and Standard Bank. The OTC market provides a relatively flexible market in terms of quotes, price, size, destinations for delivery and other factors. Bullion dealers customize transactions to meet clients' requirements. The OTC market has no formal structure and no open-outcry meeting place.
The main centers of the OTC market are London, New York, Hong Kong and Zurich.
Mining companies, manufacturers of jewelry and industrial products, together with investors and speculators, tend to transact their business through one of these market centers. Centers such as Dubai and several cities in the Far East also transact substantial OTC market business, typically involving jewelry and small plates or ingots (1 kilogram or less) and will hedge their exposure by selling into one of these main OTC centers. Precious metals dealers have offices around the world and most of the world's major bullion dealers are either members or associate members of the London Bullion Market Association and/or the LPPM.
In the OTC market, the standard size of platinum trades between market makers is 1,000 ounces.
Liquidity in the OTC market can vary from time to time during the course of the 24-hour trading day. Fluctuations in liquidity are reflected in adjustments to dealing spreads-the differential between a dealer's "buy" and "sell" prices. The period of greatest liquidity in the platinum market generally occurs at the time of day when trading in the European time zones overlaps with trading in the United States, which is when OTC market trading in London, New York and other centers coincides with futures and options trading on the COMEX. This period lasts for approximately four hours each New York business day morning.
The Platinum & Palladium Market
Although the market for physical platinum & palladium is distributed globally, most metal is stored and most OTC market trades are cleared through Zurich. As of September 1, 2009, London also served as a center for the clearing of OTC trades in platinum.
In addition to coordinating market activities, the LPPM acts as the principal point of contact between the market and its regulators. A primary function of the LPPM is its involvement in the promotion of refining standards by maintenance of the "London/Zurich Good Delivery Lists," which are the lists of LPPM accredited melters and assayers of platinum and palladium. The LPPM also coordinates market clearing and vaulting, promotes good trading practices and develops standard documentation.
Platinum & palladium are traded generally on a loco Zurich basis, meaning the precious metal is physically held in vaults in Zurich or is transferred into accounts established in Zurich. As of September 1, 2009, platinum & palladium began trading on a loco London basis as well. The basis for settlement and delivery of a loco Zurich spot trade is payment (generally in US dollars) two business days after the trade date against delivery. Delivery of the platinum & palladium can either be by physical delivery or through the clearing systems to an unallocated account.
Twice daily during London trading hours there is a fix which provides reference platinum and palladium prices for that day's trading. Many long-term contracts will be priced on the basis of either the morning (AM) or afternoon (PM) London fix, and market participants will usually refer to one or the other of these prices when looking for a basis for valuations. The London fix is the most widely used benchmark for daily platinum and palladium prices and is quoted by various financial information sources.
The London fix is widely viewed as a full and fair representation of all market interest at the time of the fix.
Futures Exchanges
The most significant platinum and palladium futures exchanges are the COMEX and the Tokyo Commodity Exchange (TOCOM). The COMEX is the largest exchange in the world for trading precious metals futures and options and has been trading PGMs since 1974. The TOCOM has been trading PGMs since 1982.
Trading on these exchanges is based on fixed delivery dates and transaction sizes for the futures and options contracts traded. Trading costs are negotiable. As a matter of practice, only a small percentage of the futures market turnover ever comes to physical delivery of the PGMs represented by the contracts traded. Both exchanges permit trading on margin. Margin trading can add to the speculative risk involved given the potential for margin calls if the price moves against the contract holder.
The COMEX operates through a central clearance system. On June 6, 2003, TOCOM adopted a similar clearance system. In each case, the exchange acts as a counter-party for each member for clearing purposes.
Market Regulation
The global platinum and palladium markets are overseen and regulated by both governmental and self-regulatory organizations. In addition, certain trade associations have established rules and protocols for market practices and participants. In the United Kingdom, responsibility for the regulation of the financial market participants, including the major participating members of the LPPM, falls under the authority of the Financial Services Authority (FSA) as provided by the Financial Services and Markets Act 2000 (FSM Act).
Under this act, all UK-based banks, together with other investment firms, are subject to a range of requirements, including fitness and properness, capital adequacy, liquidity, and systems and controls.
The FSA is responsible for regulating investment products, including derivatives, and those who deal in investment products. Regulation of spot, commercial forwards, and deposits of palladium not covered by the FSM Act is provided for by The London Code of Conduct for Non-Investment Products, which was established by market participants in conjunction with the Bank of England.
The TOCOM has authority to perform financial and operational surveillance on its members' trading activities, scrutinize positions held by members and large-scale customers, and monitor the price movements of futures markets by comparing them with cash and other derivative markets' prices. To act as a Futures Commission Merchant Broker, a broker must obtain a license from Japan's Ministry of Economy, Trade and Industry (METI), the regulatory authority that oversees the operations of the TOCOM.
Platinum And Palladium Investment
Professional & private investors and speculators are active in PGMs. They range from large hedge and mutual funds to day-traders on futures exchanges, and retail-level coin collectors. Physically-backed investment demand, comprising coins, bars, investments held in allocated accounts and exchange traded products, has steadily risen since 1999 and represented approximately 8% of total reported demand in 2008.
Supply
PGMs are mined mainly in South Africa, Russia, the United States and Canada.
The main supplier of platinum is South Africa, providing approximately 67% of total supply over the past four years. Russia is the second largest supplier of platinum. However, its share of world production has varied from approximately 10% to 20% of total supply over the past ten years.
Recovery of platinum from autocatalysts is the other main source of supply and provided around 16% of total supply in 2008. This source of supply increases along with autocatalyst production.
Platinum mine supply comes primarily from the prolific Bushveld Igneous Complex in South Africa, and palladium is mined mainly in Russia and South Africa. Combined, South Africa and Russia produce 80% to 90% of total global platinum and palladium supply.
The world's largest PGM producers are South Africa-based Anglo Platinum Ltd., London-based Lonmin PLC, South Africa's Impala Platinum, and Russia's Norilsk Nickel.
Demand
Jewelry demand for platinum rose to a peak of 48% of total demand in 1999 but has declined since, and accounted for 19% of total demand in 2008.
Autocatalyst demand for platinum has risen by 130% since 1999 and accounted for 51% of total demand in 2008. Industrial demand has increased by 26% over the past ten years, contributing to 23% of total demand in 2008. The global automotive industry is currently experiencing declining demand and, in certain cases, solvency concerns. A continued decline in the global automotive industry may impact the price of platinum and affect the price of the Shares.
About half of global palladium is used for automotive catalysts, and the remaining half of supply is distributed fairly evenly among jewellery, electronics, dental work and other industrial applications, the IPA says.
The vast majority of rhodium is used in auto catalysts, and iridium, osmius and ruthenium are used much more sparingly in production of products such as jewellery, chlorine, fuel cells and electronics.
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