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BookmarkA confluence of factors have propelled palladium to multi-year peaks in the past few days. Recent highs above $800 per ounce representing the highest level since March 2011, and for some a march towards 2001′s all-time high of $1,090 is considered a very real possibility.
I am amongst those who reckon that palladium is poised to enjoy further solid price appreciation, and here I outline the three major factors which should continue to drive the metal skywards.
Russian shipments on the wane
The escalating political crisis in Ukraine has been a significant driver of palladium’s ascent in recent weeks, with Russia’s alleged involvement in the conflict prompting the US and the European Union to discuss imposing heavy economic sanctions on the country.
Norilsk Nickel is the world’s largest producer of the precious metal, and last year the company produced 2.58 million ounces of the material, or about 40% of total global supply. So the possibility of trade restrictions being placed on Russia could be catastrophic for metal supplies.
And over the long-term, concerns have been voiced that planned production ramp-ups in the country will not be able to keep pace with demand.
In addition to this, Russian stockpiles have been an important source of supply for many years. But with these reserves pretty much empty sales have nosedived in recent years – indeed, metals refiner and autocatalyst builder Johnson Matthey expects sales last year to have rung in at just 100,000 ounces, down markedly from 250,000 ounces in 2012 and 750,000 ounces in 2011.
With stockpile shipments expected to fall again this year, and escalating troubles in Eastern Europe threatening the flow of mined supply to the market, the Russian Bear’s reputation as a major palladium provider is very much under threat.
Escalating production problems in South Africa
Palladium supply is also dwindling due to the effect of crippling strikes from mining workers across the platinum group metal (PGM) hotbed of South Africa.
Almost four-tenths of all mined metal is pulled out of the country, so persistent industrial action stretching back to August 2012 — when a dispute at Lonmin’s Marikana project resulted in the deaths of 34 workers after police opened fire — is having a significant impact on global supplies.
A recent report by trade paper Mining.com saw analysts estimate that between 10,000 and 5,000 ounces worth of production is being lost each day as a result of ongoing action.
And with rising electricity, fuel and construction costs already hampering margins at the country’s largest mining companies, the capacity — and indeed appetite — of these firms to match workers’ demands now and in the future could continue to hamper South African PGM output.
Rocketing vehicle demand
A backdrop of rising disposable income in developing nations is helping to drive global car demand through the roof, recently helped by a hefty drop in petroleum prices. This is a terrific omen for palladium, which is used extensively in catalytic converters to clean up exhaust emissions.
Johnson Matthey said back in November that “a return to boom conditions in the Chinese car market will lift global autocatalyst demand for palladium by 4% to 6.97 million ounces” in 2013. This was expected to comfortably offset purchases for other industrial applications as well as lower palladium jewellery demand.
And according to IHS Automotive, global car production has risen more than 13% from 2010 levels and topped out at a record 82.8 million vehicles last year. The research house expects more than 85 million vehicles to roll off the production line this year, with output anticipated to exceed 100 million by 2018.
Helped by legislative changes around the world, which require higher loadings of PGMs to reduce vehicle pollution, the car industry should continue to suck vast quantities of palladium from the market.
So what does all this mean for palladium prices?
All of the issues above point to a robust escalation in the palladium prices not just this year but well into the future.
This view is shared by the number crunchers at Bank of America-Merrill Lynch, who expect the white metal to average $792 per ounce in 2014, up almost 10% from last year, before marching to $850 next year and $900 in 2016. And the bank expects palladium to average $1,000 per ounce barrier shortly thereafter.
With the palladium market expected to remain in deficit for some time to come — a situation exacerbated by the launch of two new palladium exchange-traded funds (ETFs) in South Africa in recent months — in my opinion the precious metal looks on course to enjoy further significant price appreciation.
