Stillwater gives hope for palladium, platinum

PGM (palladium, platinum and rhodium) prices have moved strongly ahead in recent days, continuing a steady recovery that began in early 2009.

A press release from the company said given the severity of the 2008 economic meltdown, the depth of the corresponding downward price movement in PGMs perhaps was understandable, but the magnitude and momentum of the subsequent recovery in PGM prices clearly has caught many observers by surprise. Palladium at the moment is faring best, having fallen the least and recovered the most, currently off just 27% from its 2008 high. Platinum also has done well, at present down 32% from its high. Rhodium remains down 73%.

Within the recovery we also see a modest convergence of the palladium price towards the platinum price. Last March palladium was trading at just 18% of the price of platinum. Today palladium is priced at 27% of platinum, having closed some of the price gap, but still priced very attractively relative to platinum and rhodium. We expect to see this price gap narrow further going forward as research from the past several years comes to market that increases the opportunity to substitute palladium for platinum and even rhodium.

The press note said, both the stronger PGM prices and the narrowing of the price gap between palladium and platinum are good for Stillwater with its 3.3 to 1 palladium to platinum mine production ratio. Recently, we have focused on the factors behind the strengthening in PGM prices over the past year, as well as the price gap between palladium and platinum. Some of these factors are outlined below and we expect to offer a more detailed analysis of the price drivers in the Stillwater 2009 Annual Report to Shareholders now in preparation.

South African PGM production has fallen steadily since making record highs in 2006, despite strong PGM pricing and earlier projections of aggressive growth. Still, South African production for 2009 will constitute 78% of the platinum, 35% of the palladium and a whopping 86% of the rhodium produced worldwide last year.

Automotive catalytic converter technology is made possible by the unique properties of PGMs, the enabling element in the devices that have cleansed the atmosphere of major auto emission pollutants since a platinum-fitted catalyst was first introduced in 1974. From that time forward, driven by price and by surging environmental requirements, the technology has steadily evolved. In the 1990s, palladium technology emerged largely replacing platinum as the catalyst of choice for converting gasoline emissions. More recently palladium has drawn even with platinum in applications converting diesel emissions.

Surging auto demand and environmental requirements in the developing world are the largest growth factor for PGMs. Going forward auto build is projected to grow an aggressive 2% to 3% a year, as will environmental requirements. At present in the US and Western Europe, the recession-driven slump in new-car output is masking this broader trend. One must but look to China where auto build grew a stunning 40% in 2009, placing China at a build rate currently exceeding that of the mature US market.

In India and Brazil, growth rates are surging as well, and with nascent US and European economic recoveries now in progress, demand shortly could once again outstrip PGM mine production. Auto emissions limits in these developing countries are now being tightened, similar to the regulatory climate the developed world faced during the 1990s.

Palladium jewelry is not expected to have much effect on the market for platinum jewelry, but is now a widely accepted jewelry metal in its own right and commands a growing market following. This acceptance expanded further this week when on January 5, 2010, the UK officially recognized palladium as a precious metal by making use of its hallmark compulsory. Stillwater has nurtured the palladium jewelry market since its infancy in 2004. Jewelry now represents about 14% of the demand for palladium and over 25% of the demand for platinum.

Stillwater Mining Company is the only US producer of palladium and platinum and is the largest primary producer of platinum group metals outside of South Africa and the Russian Federation.