I was intrigued reading a Reuters report on Mineweb covering the projected rise in platinum prices to find out to what extent palladium was driven by the same fundamentals. The report forecast rising palladium prices next year due to the (as with platinum) power shortages in South Africa and the reduced sales from dwindling Russian reserves. Most commentators don’t give a lot of coverage to palladium. Its uses are mostly in gasoline auto catalysts, limited jewellery use and conductive pastes for electronic applications.
Balance this against an article in Resource Investor by Jack Lifton. The article is liberally sprinkled with words like cartel and suggestions of massive market collusion by producers and traders but if you can get past that it appears well researched and paints an interesting counter view to the palladium market. Firstly it debunks the view that platinum and palladium production are linked. Taking illustrations from different continents, Lifton states that palladium is produced as a by-product of nickel in Canada or Russia but not in South Africa where it is produced on its own. So platinum and palladium production are quite independent of each other.
He then goes on to say that producers like to suggest palladium and platinum consumption are also somehow linked particularly in the automotive industry. Major OEM demand and supplies are proprietary according to Lifton, as is recycling and by-product production, so at best automotive demand is educated guesswork particularly for palladium. Growth in demand has been very slow since the spike in prices earlier this decade forced consumers to trial and adopt alternatives such that demand from the electronics industry has, according to Lifton, decreased by 1 million ounces since 2000. At the same time palladium use in catalysts was also reduced.
So much for production and consumption. What about this hazy source that Reuters sighted as a swing point for the palladium price – Russian stock releases dwindling? Norilsk remember is producing palladium as a by-product of nickel and channel production into reserves to balance releases with what the market requires. Well you won’t be surprised to hear Lifton has some interesting observations there too. In his words The vaults of companies such as Norilsk, and some banks, both for their own account and for the accounts of funds that bought the metal as pure speculation in the run up of the early 2000s, are brim full of palladium. Supposedly the price has doubled since then, well in dollar terms yes it has but in Euro terms it has increased only 50%, less than the carrying cost of holding the metal for those 8 years. And both Norilsk and other investors know that if they began to sell in any volume into what is already a thin market the price would plummet.
So what to do? If you can’t sell into a thin market then you have to talk it up, create a little investment fever and hope enough punters come along to soak up sales of metal in the belief the market is going to rise. Which is exactly what the ETF’s are doing at the moment, buying up palladium, hence the analyst proclamations that the price of palladium is set to rally this year and next. At the same time, the Nymex has raised the margin requirements earlier this year on palladium futures, suggesting that they at least know there is froth in the market and some people could get burned ” they want to make sure it’s not them!