Palladium ETFs: A bet on escalating tension in the Ukraine, petrol autocats

Last week the JSE's Exchange Traded Fund (ETF) board grew to 40 through the addition of two palladium ETFs. One of them is Absa's third precious metals ETF, and another feather in the cap of its innovative ETF Tzar Vladimir Nedeljkovic. Absa's NewGold, introduced in 2004, is the biggest ETF on the South African market while its Platinum ETF, launched last year, is already twice the size of the most successful international lookalike. After the official listing launch at the JSE this morning (see video at bottom of the transcript) Nedeljkovic popped over to the Biznews.com studio to explain why escalating tensions in the Ukraine and growing autocatalytic installations in petrol vehicles are bullish for palladium's prospects. – AH  

VLADIMIR NEDELJKOVIC:  It's our third Precious Metal ETF.  We have 16 ETF's listed.  It is a logical progression.  We obviously started with the gold ETF close to ten year ago.  We've done the platinum ETF, which was listed in April last year.  Those two were extremely successful.  The new gold ETF is the largest ETF in South Africa and in Africa.

ALEC HOGG:  How big is it?

VLADIMIR NEDELJKOVIC:  It is about R17bn at the moment, so 42 tons of gold bullion sitting in the fund.  Then, the platinum ETF is something that we were really surprised by, that this fund is now the largest platinum ETF globally, almost double the size of the closest competitor, which is the U.S. platinum ETF, and that is another R15bn in assets.  I think we have had many enquiries from our institution investors regarding bringing the third precious metal ETF, which is the palladium.  Obviously, palladium is a smaller market, so there's lots of work in sourcing the underlying physical metal, especially because of the fact that it has to be of South African origin.  We obviously spent some time sorting out the sourcing of the metal, and now that all these issues are resolved, we have the product in the market.  We listed on Thursday.  The trading has gone quite well, we already have some inflows into the fund.

ALEC HOGG:  Just take us through the process.  When you say needed to source the metal first, do you buy a whole bunch of palladium, put it into a vault somewhere, and then sell it off?

VLADIMIR NEDELJKOVIC:  No, what we do is, we need to source the lines when we need to create because obviously, this is an open-ended fund and as the investors want to buy more, we need to source the metal and create more units.  We need to be in a situation where we can source the metal – if we need it today, we can get it today – and that's what requires work.

ALEC HOGG:  You can't exactly close the fund if someone wants to buy.

VLADIMIR NEDELJKOVIC:  Exactly, so we need to be able to do it very rapidly.

ALEC HOGG:  But you get it in South Africa, because we don't know much about palladium here.  There's a PGM of course, but we seem to be very focused on platinum.  Why is that?

VLADIMIR NEDELJKOVIC:  Platinum is the largest…South Africa produces, by far, the majority of platinum in the word – about 70 percent.  We are only producing about 30 percent of global palladium so obviously, it's not as known in South Africa as platinum.

ALEC HOGG:  But why would you start a palladium fund in the first place if you have already have platinum here?

VLADIMIR NEDELJKOVIC:  Well, they are similar in one respect, but they are quite different.  Both metals are used as catalytic converters, but one of them is used in petrol cars, and the other one in diesel cars.  Your platinum is therefore used in diesel and palladium is used in petrol cars.  Obviously, in different parts of the world, people predominantly, drive different types of vehicles for example in Europe, they predominantly drive diesel cars.  People therefore have different types of views on the recovery of Europe versus the recovery of the U.S. where they drive petrol cars, that's the one element.  In addition, there is an element of supply and demand because platinum is predominantly linked to the fortunes of the South African mining industry, while palladium is produced here and in Russia, so Russia and South Africa are the largest producers.

ALEC HOGG:  So when you have problems in South African mines, the platinum price would react.

VLADIMIR NEDELJKOVIC:  So all those factors impact differently – the metals – and I think investors will look at those metals in that context.

ALEC HOGG:  Has there been much reaction to the palladium price, given what's been going on in Ukraine?

VLADIMIR NEDELJKOVIC:  Not particularly, I think- at the moment, not yet.  Let me put it that way.  I think what we see – and obviously, I'm not a metal analyst – but from the research I read, there is a fundamental long-term projection for the shortfall of metal going forward.  I think people believe that the long-term prospect for the palladium price is quite positive.

ALEC HOGG:  Hence, the demand from institutional investors, etcetera.

VLADIMIR NEDELJKOVIC:  That's correct.

ALEC HOGG:  Just to dwell a little on the platinum and the success of your platinum ETF, because it was only launched in 2013…

VLADIMIR NEDELJKOVIC:  In April last year…

ALEC HOGG:  New Gold is nearly ten years older and yet, platinum is almost the same size.  Has this been South African demand?

VLADIMIR NEDELJKOVIC:  It is all South African demand.  I think the reason for that, again, is the fact that South Africa produces the predominant majority of platinum in the world.  I think people, for that reason, are quite…they believe that the platinum is important for the future of South Africa, so they see this product almost as a country hedge, if you want.

ALEC HOGG:  Isn't it a hedge against the strike?  If you own platinum shares, maybe you should be buying those…

VLADIMIR NEDELJKOVIC:  That's exactly it.  There has been quite a lot of underperformance in the platinum shares/ platinum producers, platinum itself has obviously performed much better, and people (a) want to diversify and (b) basically, they see it as a hedge against any weakening in South Africa, because anything that happens in South Africa might have impact down the chain, on the platinum price.  I think that is what attracts institutional investors.

ALEC HOGG:  Getting back to palladium itself: we know there's platinum jewellery.  Is there palladium jewellery?

VLADIMIR NEDELJKOVIC:  There is, but not to that extent.  People are trying to develop that market, but it's still on a small scale.

ALEC HOGG:  So the play on palladium would be on the one hand, supply from Russia, and on the other hand, demand from an economic…

VLADIMIR NEDELJKOVIC:  Catalytic convertors and basically, looking at the recovery of a particular market.

ALEC HOGG:  Do you have any more Precious Metal ETF's in the pipeline?

VLADIMIR NEDELJKOVIC:  We always say…obviously, we want to see how this one goes.  The other issue is that if you go down the tail of the PGM's in particular, the issue of sourcing the metal becomes more and more difficult.  We can look at rhodium for example, but rhodium is significantly smaller than even the palladium market.  The problems become more and more complex and at some stage, you will see that the cost benefit doesn't work anymore.