"The industry has many pain points from where it is right now. The main industry risk is the lack of a bilateral transaction mechanism," said Cao Huoju, chairman of Shenzhen Better Gold.

"We don't have enough different futures contracts for enough PGMs. We should have more now - there are only platinum and palladium, but what about iridium, ruthenium and osmium? We need to have like futures products for especially the small PGMs because small- and medium-sized enterprises are exposed to major risks and need to do hedging," said Cao.

 

The problem has not gone unnoticed by China's policymakers. Platinum and palladium are among 16 products including polysilicon, rare earths and lithium that the Guangzhou Futures Exchange (GFEX) - launched in April 2021 as China's newest commodities bourse - has received government approval to launch contracts for soon, deputy general manager Leng Bing said in a speech at the Shanghai event.

"In order to help the PGMs industry develop in a high-quality manner and help achieve China's dual carbon goals, the GFEX will launch platinum and palladium futures varieties as soon as possible," said Leng, referring to the country's official targets to peak carbon emissions before the end of this decade and achieve carbon neutrality by 2060.

Platinum and palladium form an important component of the planned contract varieties on the GFEX as the price volatility of PGMs has increased significantly in recent years, Leng said. Chinese spot price volatility for platinum and palladium stood at 26.47% and 33.31% respectively last year, significantly higher than gold's 17.32%, while the volatility of international platinum and palladium futures prices reached 30.24% and 36.29% respectively, according to Chinese media.

China - the world's top PGMs market - accounted more than one-third of global demand last year, but the domestic industry has "very weak risk awareness" that has left some investors high and dry overnight, according to Cao. He pointed to how rhodium prices crashed from RMB 7,000 ($1,004) per kilogram to RMB 2,000 per kg last year, which forced some of his clients to liquidate their position or face insolvency.

Shenzhen Better Gold is insulating itself against price volatility by building up platinum inventory and hedging via overseas futures exchanges, according to Cao. The company is looking forward to the launch of domestic platinum futures as it will no longer need to go through foreign commodity exchanges and will save on expensive cross-border fees when settling overseas transactions.

 

The inability to hedge can leave Chinese investors in precarious positions, according to Chen Dongwei, deputy general manager at Sinosteel Futures. "You can make a lot of money and you lose a lot of money. If you want to sell out, you cannot because the timing is not right because there's not enough liquidity on the platform to do a real-time transaction."

At the same time Chen said the GFEX will need to keep in mind when designing the contracts that some level of volatility is necessary to ensure they attract a sustainable level of trading volume.

"It should be volatile but not too volatile. If there is no volatility there wouldn't be any investors and if you have no investors, you don't have a counterparty to hedge with," said Chen, who helped design a number of iron and steel futures contracts traded in China today. "But you shouldn't over-design that liquidity - if it is like rocketing up or nosediving, then heads are going to roll."

When China was drawing up its rebar and iron ore futures contracts, Chen insisted on physical settlement and delivery to reflect market fundamentals and to avoid fraud, but she noted this is unlikely to be necessary for PGMs.

"Physical delivery of precious metal is simple as it cannot be easily replaced with something of suboptimal quality. It's also easy to test the quality of precious metal so I don't think it will be a big deal if you don't do physical delivery," she said, predicting that non-physical contracts would be quickly accepted and well-received by the market. "Once we have such a contract in place, that will be one more option or channel available for investment and speculation."

Platinum's price volatility is greater than gold's, which presents opportunities for speculation and profiteering, but one issue is the lack of market liquidity, according to Zhu Zhigang, vice president and chief analyst of the Guangdong Gold Association. "You don't have the tools to cash in on the volatility, so you missed out on the investable ideas and investable timing because of that."

Platinum is a challenging metal to melt due to its high melting point of 1,768 degrees Celsius - an attribute Zhu said has contributed a wide gap between buying and selling prices that currently limits Chinese interest in platinum as an investment asset.

"If you invest in a gold bar, the price differential for buyers and sellers is about RMB 10-12 per gram, which is fine. Platinum is different - it can be RMB 25-28/g, so getting back your investment on a bar of platinum can be difficult," said Zhu.

Listing platinum and palladium futures in the future will benefit the development of China's hydrogen economy in the long run by allowing industry players to lock in the price of precious metal feedstock, allowing them to concentrate on research and development, said Leng from the GFEX.

The contracts could also help win more price-setting power for China in the global market. Although China is the world's largest PGM consumer, domestic resources are scarce - the country has one platinum mine - and foreign dependence on PGMs can exceed 90% in some cases. China's platinum imports have also accelerated since the second half of 2020 on the back of strong speculative buying, shifting inventories away from London and Zurich.

"Domestic demand is strong, the concentration of foreign producers is high, and there is a lack of a unified and influential domestic price reference," said Leng. "If platinum and palladium futures prices can be denominated in RMB, domestic enterprises can use them as a pricing reference in international trade, allowing them to take the initiative."

Global platinum supply in 2021 recorded a surplus for the sixth consecutive year of around 26 tonnes, according to consultancy Metals Focus. A smaller surplus of 15t is forecast for 2022 with aboveground stocks tipped to reach nearly 330t or equal to 17 months of development demand - up from 11 months a decade ago.