Palladium

Overview

The price of Platinum and Palladium have both been steadily riding for more of the year, particularly as a consequence of mining strikes for half the year since January in South Africa, the largest platinum and second-largest Palladium producer. This had led to supply concerns throughout the year, overextending the value of existing stockpiles and leaving it vulnerable to a violent pullback once a resolution with strikers had been found. This is exactly what has happened, and prices are now approaching what could be corrective points where we would be buyers.

The reason we would buy are that palladium’s fundamentals remain very attractive, and I have highlighted the key points below:

1. Palladium’s Biggest Producer is Already In A Supply Crunch:

When it comes to palladium, Russia matters more than South Africa, since it provides 42% of global supply. Remember: palladium demand is expected to rise more than platinum, due to new auto emissions control regulations in Asia. But Russia’s mines are also in trouble…

  • Ore grades at Russia’s major mines, including the Norilsk mines, are reported to be in decline.
  • New mines will take as long as 10 years to come online. It could take a decade for Russian production to rebound—if Russia even has the resources to do it. This stands in stark contrast to global demand for palladium, which has grown 35.8% since 2004.
  • Russia’s aboveground stockpile of palladium appears to have dwindled to near extinction. The precise amount of the country’s reserves is a state secret, but analysts estimate stockpiles were 27-30 million ounces in 1990.
  • It was highly likely that Russia has sold almost all its inventory, especially if you consider the surge in price during Russia’s annexation of Crimea prompted further supply restriction fears. This paints a sobering picture for the world’s largest supplier of palladium—and is very bullish for the metal’s price.

2. Demand for Auto Catalysts Cannot Be Met:

The greatest use of PGMs is in auto catalysts, which help reduce pollution. Platinum has long been the primary metal used for this purpose and has no widely used substitute—except palladium. But that market is already upside down.

  • Palladium is cheaper than platinum, but replacing platinum with palladium requires some retooling and, on a large scale, would worsen the supply deficit.
  • As for platinum (which does work better than palladium in higher-temperature diesel engines), auto parts manufacturers are expected to use more of it than is mined this year, for the third straight year.
  • Some investors may shy away from PGMs because they believe demand will decline if the economy enters a recession. That could happen, but tighter emissions controls and increasing car sales in Asia could negate the effects of declining sales in weakening Western economies.
  • For example, China is now the world’s top auto-producing country. According to IHS Global, auto sales in China are projected to grow 5% annually over the next three years. PricewaterhouseCoopers forecasts that sales of automobiles and light trucks in China will double by 2019. That will take a lot of catalytic converters. This trend largely applies to other Asian countries as well. It’s important to think globally when considering demand.
  • The key, however, is that supply is likely to fall much further than demand.

Conclusion: The Birth of A Multi-Year Bull Market

Add it all up and the message is clear: by any reasonable measure, the supply problems for the PGM market cannot be fixed in the foreseeable future. We have a rare opportunity to invest in metals that are at the beginning of a potential 10-year bull run. We, thus, wouldn’t wait to start building a position in PGMs.

GFMS, a reputable independent precious metals consultancy, predicted earlier this year that the palladium price will hit $930 by year-end and that platinum will go as high as $1,700. But that will just be the beginning; the forces outlined above could easily push prices to double over the next few years.

At that point, stranded supplies might start coming back online—but not until after major, sustained price increases make it possible.

The other major Platinum Group Metal [PGM], Palladium’s price is determined by similar factors to Platinum however when it comes to mining supply, Russia matters more than South Africa, since it alone provides 43% of global supply. Demand is expected to rise more than platinum, due to new auto emissions control regulation from Asian markets. But Russia’s mine are also in trouble.

Ore grades at Russia’s major mines, including the Norilsk mines, are reported to be in decline. New mines will take as long as 10 years to come online. It could take a decade for Russian production to rebound—if Russia even has the resources to do it. This stands in stark contrast to global demand for palladium, which has grown 35.8% since 2004.

Russia’s aboveground stockpile of palladium appears to have dwindled to near extinction. The precise amount of the country’s reserves is a state secret, but analysts estimate stockpiles were 27-30 million ounces in 1990.

The greatest use of PGMs is in auto catalysts, which help reduce pollution. Platinum has long been the primary metal used for this purpose and has no widely used substitute—except palladium. Auto sales in China are projected to grow 5% annually over the next 3 years. That will take a lot of catalytic converters. The key here is that supply is likely to fall much farther than demand