/ 1 January 2002

PGM market cloaked in mystery and rumour

For every seed of truth, a thicket of rumour, speculation and lies. For every confirmed fact, a gallery of smoke and mirrors.

For every seed of truth, a thicket of rumour, speculation and lies. For every confirmed fact, a gallery of smoke and mirrors.

All commodities markets are susceptible to hazy information, but few match the platinum group metals (PGMs) for mysterious price swings and downright misinformation.

PGM prices soared in Asian trade on Wednesday after a dramatic short squeeze in New York palladium futures, but even as the shock waves ricocheted across time spans, no one could say for certain what had caused the eruption.

”It’s a fact that for everything we know for sure, there are 10 or 20 rumours floating around,” said a commodity analyst with one of Japan’s big brokerage houses.

”In the end, we just don’t have a clear picture of the supply situation. And compared with gold and silver, the PGM market is tiny.”

Some Japanese traders attributed Wednesday’s fireworks to a mysterious player whom they said was trying to ramp up prices by placing massive buy orders on New York’s NYMEX, triggering a flurry of stop-loss orders in an illiquid market.

Others scratched their heads in amazement as the short squeeze sent spot palladium hurtling to three-month highs and platinum bounding to levels not seen since last June.

”Nobody knows why,” a trader with a big Japanese trading house said. ”It’s not a very wise idea to place a high order in a thin market.”

NEUROTIC SIBLING

The sudden surge in palladium prices, which was petering out on Thursday as profit-taking set in, was in character with a metal known as the neurotic sibling of the PGM family, prone to sullen depressions and savage price swings.

Dealers say palladium’s sheer lack of liquidity makes it vulnerable to market manipulation, while angst over unstable supplies from top producer Russia is never far below the surface.

Russia produces about 60 percent of the world’s palladium — used in catalytic converters, dental alloys and electronics — and treats PGM sales as a state secret.

Year after year, supplies of palladium have been disrupted by bureaucratic wrangling.

That instability helped to drive the silvery-white metal to an all-time fixing high of $1,094 an ounce in January 2001. It was trading at around $340 on Thursday afternoon.

Russia pulled out of the PGM spot market in the middle of last year due to low prices and slumping demand. Expectations of its imminent return have fuelled a feverish rumour mill ever since.

Some Japanese traders said the PGM complex’s wild image could partly be blamed on the mechanics of the market — at least in Japan. They cited the Tokyo Commodity Exchange, the world’s biggest PGM futures market, as a prime example.

”One of the reasons TOCOM is so volatile is that the main participants are the public,” a trader said. ”That means they are just doing it for price fluctuations only. They are not doing arbitrage.”

That makes the market more vulnerable to price-distorting rumours and aggressive squeezes, the trader said.

TOCOM’s most actively traded contracts are invariably the furthest months, giving participants more than 10 months to play the game. On NYMEX, the most active month is typically two or three months away.

”Another of TOCOM’s features is that brokers can do matched trade,” the trader said, referring to the practice of placing simultaneous buy and sell orders for the same amount, banned on overseas exchanges.

”So they can totally manipulate turnover.” – Reuters