Hot on the heels of the phenomenal success of its platinum exchange-traded fund, South Africa’s Absa Capital may enjoy even greater demand for a palladium fund it is planning if it manages to clear the hurdles in the way to its launch.
Accumulating more than 500,000 ounces of the metal since inception on April 26, NewPlat ETF, the first South African platinum-backed fund of its type, already accounts for around one quarter of global platinum ETF holdings.
South African investors – the platinum fund attracts demand from pension funds and few high-net worth individuals – said they would be more interested in investing in palladium and in some cases even switch to it from platinum.
“Looking at long-term supply and demand, we would have a preference for palladium,” Graham Tucker, quantitative strategist at Old Mutual Investment Group, MacroSolutions, said. Parent company Old Mutual Assurance held 9,400 ounces in the NewPlat ETF as of the end of May.
Both platinum and palladium prices, while under pressure from a sharp drop in bellwether precious metal gold this year, have taken some support from the threat of supply outages in South Africa, where wage negotiations between mining companies and unions have been fractious.
In addition, palladium secondary supply from major producer Russia is also expected to decline as analysts believe state-controlled inventories, sales of which have added significantly to supply in recent years, may be near depletion.
The demand picture is also brighter for palladium, used in catalytic converters to clean exhaust emissions of gasoline-powered vehicles, the predominant auto fuel in China and the United States, where demand shows continued signs of growth.
Platinum however is chiefly used in diesel engines, whose main market Europe is experiencing low demand.
But there are challenges ahead for Absa as it pushes to launch the fund. The greater difficulty in sourcing palladium than platinum within South Africa is likely to curb the rate at which palladium could be added to an ETF, analysts said.
One of the conditions of Absa’s existing gold and platinum ETFs listed on the Johannesburg Stock Exchange (JSE) is that the metal has to be of South African origin, more of a problem for a product backed by palladium, which is mostly sourced in Russia.
“South African miners produce nearly twice as much platinum as palladium by volume and it is by far their main revenue earner,” Macquarie analyst Matt Turner said.
Traditionally main PGMs producers Anglo American Platinum , Impala Platinum, Lonmin and Northam Platinum sell significant proportions of their output under long-term contracts to car companies or jewellery makers.
These have been much more interested in taking palladium than platinum over the last few years, mopping up more available supply of palladium, analysts said.
Vladimir Nedeljkovic, head of investments at Absa Capital said the bank recognised that sourcing the metal was one of its major challenges. “We are aware of that and we are working on that,” he said, without giving details.
Fund investment in listed commodities is capped in South Africa at 10 percent in gold, or up to five percent in other commodities, including platinum and palladium. That may provide another natural cap on commodity ETF investment.
“At some stage between gold, platinum and palladium people are going to hit the commodity limit, so obviously we can’t get an exponential increment in growth,” Nedeljkovic said. (Editing by Jan Harvey and James Jukwey)