Short Hairs

Let's say you are General Motor's Purchasing Manager for platinum, palladium and rhodium, all essential ingredients in every single car's catalytic converter. How much should you have on hand? Hmn. Enough so you are never in the position of shutting down your company's entire production line! Do you have the budget for that amount? Have you communicated to management current pricing and the market's tightness? Are you willing to urge that you build rhodium inventories at all time highs of $20,000 plus per ounce? Do you truly understand how tight the market is? And in this already in deficit market, what if investors come into the market in a big way? How does that change things?

Frankly, I wouldn't want the job today. If you are in the know, the only rational answer, is to go long big time. And that is not so easy, because if you are wrong, meaning that prices in the future are lower, or there is no need to carry so much inventory since all metals are readily available, your name is on the ticket. 

The right answer is for this to be a strategic CEO decision, given the nature of the market, but that requires a highly informed purchasing department with a vision about an unfolding short squeeze. Yes short squeeze, in the sense that the market is "short" all of the platinum group metals, which are all in deficit. And as time goes on, with continued growth in the world economy, PGM demand is going to accentuate the deficit so that what is a deficit will very likely become a "squeeze", especially once investors fully get wind of the tightness in the supply chain. (Sure if the economy goes South, this PGM issue will be only a modest challenge, but with money flow today, expected increases in economic activity, and generally robust demand for commodities, I don't believe that is likely to occur.)

In fact this is a challenge throughout industry. And it is a challenge for government, where platinum, palladium, rhodium, ruthenium and iridium are all strategic assets and essential for military use in addition to being ubiquitous, essentially without substitute, in the civilian economy. 

I don't think an investor really needs to think to hard to understand, and the more investors understand, the more they compete with industrial and strategic users, further reducing available supplies. The facts are clear. Take a look at the limited annual supply, including recycling, of each of these metals and I suspect you may find yourself in the midst of the "AHA Phenomenon." Or said differently, "Holy Moly!' Or maybe, "Holy Sh_t!"

These are rough numbers, but platinum ($1080) yearly supply is about 8 million ounces, including recycling. Palladium ($2330) is about 10 million ounces. Rhodium ($20,000) is about 1 million ounces. Iridium ($4000) about 400,000 ounces. Multiply these numbers by the prices, and you have the value of annual supply. Now think about that number in the context of money under management; or other commodities (oil is about 100 million barrels a day); or the market cap of stocks. And then understand that in most uses no PGMs means NO PRODUCT. 

Remember. Not like you can substitute for a platinum group metal. Also, not like you can just simply draw down on inventory. (Not much out there, other than Russia who is the swing producer and in a very real respect has the world by the "short hairs." Yes that's graphic but accurate.) Or easily increase  production. 

So bottom line, as they used to say, "Good luck to you and the Red Sox!" (Well there was a time when the Red Sox always lost.) Said differently, if you are a purchasing manager, I suggest you get serious about what is a short on your books of the rarest and most essential commodities on planet earth. If you are an investor its much easier... Just buy these metals, or buy Sibanye Stillwater (SBSW), the world's largest PGM producer which is a highly disciplined company with incredible assets and a brilliant CEO. Or some Impala (IMPUY).


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