Does the JSE really need a palladium ETF?
Both Standard Bank and Absa Capital are launching new palladium ETFs to complement the many platinum ETFs already available. At first, I thought this was curious, but on reflection, it's actually a little surprising that it's taken so long for this to happen. Palladium is one of the PGMs – the platinum group metals – that are mined as a package deal in South Africa. Platinum, palladium, rhodium (and three other PGMs) are clustered together on the period table, and usually in the crust of the earth too. They are all useful industrial metals, with the palladium-group elemtents (palladium, platinum, and rhodium) acting as particularly good catalysts used in engines worldwide. The prices of the three metals are different – platinum is quite a bit pricier than palladium, because they are used for slightly different purposes – but most of the market fundamentals are the same, and it really makes sense that the JSE would offer a palladium ETF in addition to existing platinum ETFs in order to enable investors to offset the risks assailing PGMs producers by buying the actual product. – FD
GUGULETHU MFUPHI: South Africa's first palladium ETF will be listed on the JSE today by Standard Bank and later in the week, Absa Capital will do the same. Johann Erasmus, Head of the Executive Global structuring group at Standard Bank as well as Vladimir Nedeljkovic, Head of Exchange Traded Products at Absa's Corporate and Investment Banking division, join us now for more. I just need to comment on your name. Alec always gives me a hard time when there are difficult names to pronounce, but I think I did a fairly good job today.
ALEC HOGG: Top class.
VLADIMIR NEDELJKOVIC: Perfect
GUGULETHU MFUPHI: Thank you Vladimir.
ALEC HOGG: I don't know what the Zulu version of it is.
GUGULETHU MFUPHI: Well, we'll find one – Vilakazi maybe – because it starts with a 'V'. Johann, perhaps we can start off with you. The interest in palladium: why launch a palladium ETF now?
JOHANN ERASMUS: It's one of the PGM metals that are mined by our producers and it comes out as a basket, so our miners don't just mine platinum; they mine a basket of PGM's and palladium is the second-biggest of that basket. South Africa is also the second-biggest palladium producer in the world, after Russia.
ALEC HOGG: Why is palladium cheaper than platinum?
JOHANN ERASMUS: Its market fundamentals. What many people don't understand, is that the two metals are both used in catalytic convertors, but platinum is predominantly in diesel vehicles and palladium is more in your petrol vehicles. That is the underlying economics and fundamental play between the metals in terms of supply and demand, which jurisdiction sells more petrol cars and which jurisdiction sells more platinum cars, and that drives the supply and demand.
ALEC HOGG: But is platinum a better catalyst? Presumably, if it weren't a better catalyst, it wouldn't be higher-priced.
JOHANN ERASMUS: No, not at all, it's supply/demand – how much is available in the market and what is being used? The PGM metals are also interchangeable between each other. There's a third one, which is used for catalytic converters as well – rhodium. Depending on the price and/or the research that goes in, that determines the prices between them.
ALEC HOGG: So there's a lot more palladium produced in the world, than platinum.
JOHANN ERASMUS: No, I would think they're probably about the same amounts.
ALEC HOGG: So why is one more expensive than the other one?
JOHANN ERASMUS: There's just more demand for platinum.
ALEC HOGG: Why is there more demand for platinum?
JOHANN ERASMUS: There are more diesel cars at this stage. Yellow metals use platinum as well. That changes as well as demand for cars change in terms of different jurisdictions. There are ratios in terms of how much metal is used for the catalytic convertors, so it's a very technical discussion at the end of the day.
GUGULETHU MFUPHI: Vlad, keeping with platinum, you've recently – or rather, not too recently – your platinum ETF has seen a great amount of success.
GUGULETHU MFUPHI: What has been driving that success?
VLADIMIR NEDELJKOVIC: As Johann said, South Africa is the largest producer of platinum globally, and I think particular institution investors in South Africa are quite familiar with the metal. They've obviously managed to invest in the underlying miners. I think that the performance of the metal itself was significantly better than the performance of the mining, so I think people know about it. Because of the importance of platinum for the country, I think it is something that… The institutional investors put their money into platinum ETF almost as a defensive play, and I think they have been investing relatively large sums.
ALEC HOGG: Yes, it's a bit of an insurance I'm sure, with the strike going on at the moment.
VLADIMIR NEDELJKOVIC: Yes and again, the supply and demand…you asked the questions about why the platinum price is higher. You always have to look at the slightly longer-term horizon and you have to look at surplus and deficit of a particular metal at a particular moment in time. Obviously, I'm not a metal analyst, but from what we read from our colleagues, there is quite a bit of pent-up demand and a lack of supply in all the PGM's – both in platinum and palladium – going forward, and we're talking about four or five years from now. From the investor point of view, both investments are probably going to prove to be quite good ones.
ALEC HOGG: But given that the Russians produce most of the palladium in the world (we produce most of the platinum)…given the sanctions that the West is putting onto Russia in various ways, it seems as though it's a pretty good time to be launching a palladium ETF.
JOHANN ERASMUS: It can be a good time. It can also be a bad time because in terms of Exchange Trader Funds, you have to source the underlying metal. If there' s a shortage of metal, it can squeeze prices up. It is therefore not necessarily always a good thing to have a quick rally on the back of supply and demand shortages versus the long-term fundamentals, on why you would want to invest in metals where, if the price is driven up because of what's happening in Russia, what's happening locally, as well as the supply/demand via the ETF's, that price can come back just as quickly.
ALEC HOGG: Traders love it and volatility is their best…but why are you both launching palladium ETF's in the same week?
JOHANN ERASMUS: From our perspective, we view this as a very good product and there's definitely a demand for it. We're also launching gold and platinum on the 7th of April. We believe the market's big enough for competition and given the demand for ETF's growing in the country, we believe that it's a good space to play in.
ALEC HOGG: So it's coincidental in your case. From your side…
VLADIMIR NEDELJKOVIC: We've been on the record for a while. In the studio, we talked about launching a palladium ETF a couple of times, and we've been on record that we wanted to launch it before the end of Q1. What we really wanted to do and we spent… Palladium, as Johann mentioned, it's obviously… The sourcing of the metal: given the fact that South Africa is not the largest producer in the world, is slightly more complex than sourcing for example platinum. We needed to ensure that when we launched the product, we could go in with full liquidity, with tight spreads, and offer the products that investors have the same experience as they have in the gold ETF or in the platinum ETF. We therefore don't just want to launch the product. We want to launch it properly.
GUGULETHU MFUPHI: Just coming back to the launch from both of you regarding a similar product, are there any irregularities that you need to go through to ensure that the playing field is even?
JOHANN ERASMUS: Yes, I think that between the JSE… The JSE governs the listings and then generally, because of commodities, which were historically been as foreign assets, there are Reserve Bank regulations that one also has to adhere to. There are, therefore, quite many steps one has to go through in order to get these ETF's up and running, as well as then, as my colleague alluded, the sourcing of the underlying metals for these funds as well.
ALEC HOGG: Colleague? I thought you guys were competitors. So, are they going to be qualifying as local or domestic, so that it's outside of the requirements?
VLADIMIR NEDELJKOVIC: Obviously, they qualify as domestic assets, but there are certain requirements that the Reserve Bank would put on that in order for a product to qualify as domestic, so the metal needs to be manufactured in South Africa and that is what creates the complexity in the creation of that product.
ALEC HOGG: Just one thing: where does all of this palladium (in this case) and platinum (in your case) reside?
JOHANN ERASMUS: Ours is warehoused with JP Morgan in London.
VLADIMIR NEDELJKOVIC: Ours is warehoused at Barclay's in London.
ALEC HOGG: So it's in London, so there's no chance of some shrewd operator making a platinum heist.
VLADIMIR NEDELJKOVIC: When we started our gold ETF originally, it was stored at Rand Refinery. When the fund became too big for Rand Refinery, we actually got the SAAB approval to move it to London.