Stillwater Mining Co (SWC) yesterday commented on the impressive 2009 recovery in PGM prices following the collapse in those prices in the fourth quarter of 2008 during the economic meltdown. PGM (palladium, platinum and rhodium) prices have moved strongly ahead in recent days, continuing a steady recovery that began in early 2009. Palladium, which just over a year ago had fallen 72% from its 2008 high of $582/oz to a 2008 fourth quarter low of $164/oz, yesterday was quoted in London at $422/oz, up 157% from the 2008 low. Platinum, which fell 66% from its record high of $2,273/oz in early 2008 to a low of $763/oz a few months later, had recovered by 104% to $1,556/oz. Rhodium, which fell 90% from its 2008 peak of $10,100/oz to bottom out at $1,000/oz, yesterday was quoted at $2,750/oz, up 170%. Commenting on the recent buoyancy in PGM prices, SWC Chairman and CEO Frank McAllister observed, “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.“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.”Financial factors are having a significant influence on PGM prices in general. Those with the most impact include weakness in the US dollar, a surge in precious metal sentiment and investment (both as a safe haven and as an attractive investment), and the newly approved US ETF securities for both platinum and palladium.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. The issue: multiple challenges face the PGM miners in South Africa, according to SWC – “work interruptions related to mine safety; shortages of and conflicting priorities for electricity and water supplies; a strong Rand (local currency); aggressive wage demands and labour actions; failure to meet increasing capital expenditure requirements needed just to maintain production in ever deepening mines; worker skill shortages; failure to develop adequate replacement mines; and political involvement in mining. Concerns about South African production have driven the stronger PGM pricing we have seen over the past year. And given the predominant role of South African production in meeting world PGM requirements, PGM pricing in the end will always be influenced by the South African PGM market basket with its 2 to 1 platinum to palladium bias, in particular during times of a market shortage of the metals. The bias also suggests a continuing need for a strong platinum price to entice the production necessary to meet world PGM requirements. Yet even today’s $1,276/oz market basket price still leaves the cost structure and capital sustainability of many key South African mines at risk.”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; and now palladium can even replace scarce rhodium, albeit at high prices given a replacement ratio of 8 to 1, in converting NOx emissions. Such applications today account for over 50% of worldwide PGM consumption. Price driven substitution toward palladium in this whole arena is underway and continuing.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. Despite efforts to develop alternatives, it appears that for the foreseeable future the internal combustion engine will continue to dominate in this compounding numbers phenomenon — as surging developing world demand for automobiles and ever tighter emissions control limits on them feeds a growing demand for PGMs, led by palladium.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 recognised palladium as a precious metal by making use of its hallmark compulsory. Stillwater says it “has nurtured the palladium jewellery market since its infancy in 2004. Jewellery now represents about 14% of the demand for palladium and over 25% of the demand for platinum.“Russian government palladium stocks remain a state secret and thus a market wild card. At one time sales from these stocks totaled nearly 2 Moz/y. Because such sales have diminished in the last couple of years many consider the stocks near to, or at a point of, exhaustion. Putting the stocks into perspective is critical to an understanding of their market impact. Total worldwide production of platinum and palladium has been in nearly equal quantities for the past 20 years — amounting in aggregate to a little over 100 Moz of each. Some speculate that sales from the Russian palladium stockpile over the same time period exceeded 25 Moz. This market perspective suggests: 1) because of the stockpile sales, over 25% more palladium has been consumed during the past 20 years than platinum; and 2) when the palladium stocks are exhausted the available supply flow of palladium will run short of market requirements.”Price disparity between products that compete for the same market is a curious thing. In the end, in the absence of compelling product differences, such competition is settled by price. For most of the catalytic converter market there is little compelling product difference between palladium and platinum — except price. With over 50% of the demand for all PGM metals now competing for the catalytic converter market, price is now the determining factor, which makes palladium the metal of choice. With this shift progressing, the auto market growing, and the exhaustion of Russian stocks nearing, price convergence between palladium and platinum will shortly become a reality and determining the appropriate price equilibrium between the two will be a new market riddle.Stillwater Mining is the only US producer of palladium and platinum and is the largest primary producer of PGMs outside of South Africa and the Russian Federation.