Palladium prices could skyrocket

Seeking Alpha | November 21, 2011

Palladium and platinum, interesting to us almost solely because of their industrial uses in auto catalytic converters, may see a change in their supply picture in the coming years.

Palladium and platinum, which are essentially both extracted at the same mines and from the same ore, have had nearly identical price movements in 2011, starting out the year at a high and then taking a drastic dip in October.

Top: 2011 year-to-date LME palladium prices. Bottom: same for LME platinum. Source: Kitco

The two metals’ parallel path is no surprise, but the biggest thing to keep in mind is that, even though both palladium and platinum have been in a relative supply surplus and will stay that way for a few more months, the supply will get tighter in 2012 and beyond – at least for palladium. Analysts at Johnson Matthey, a PGM refiner, and Russia’s Norilsk, the single-largest producer of palladium, supported this notion in recent reports and comments.

In a recent FT article, Johnson Matthey forecast that palladium would trade at an average of $650 per ounce over the next six months, and platinum to trade at $1650 per ounce during the same time period. Russian agency Gokhran, the body in charge of selling Russia’s infamous palladium stockpiles, announced they would drastically reduce stockpile sales to 145,000 ounces next year – a more than 400 percent decrease – according to the article. In the short term, however, investors have been selling off; physical palladium ETFs will sell 215,000 net ounces of palladium, whereas they bought 1.1 million ounces last year.

Speaking of ETFs, ETF Securities, one of the forerunners in featuring physical palladium and platinum ETPs, hosted a call in which Anton Berlin, Norilsk’s head of analysis and market development, shed light on the producer’s palladium outlook.

Berlin also stressed the importance of Gokhran’s announcement (a rather big one, considering Russian stockpiles provide a majority of global palladium supply). He said a source within Russia’s Ministry of Finance had been quoted as saying the current stockpile sits at 800,000 ounces and that, yes, Gokhran should reduce sales to 140,000 next year – but come 2014, the sales number will be zero.

Juxtapose that with the fact that Norilsk doesn’t expect their production to change markedly until 2020. Production growth will remain steady, but not as robust as the producer hopes, Berlin said, staying at no better than 2 percent annually. That will be at least half the projected demand growth of 4-5 percent per year.

Berlin said Norilsk is having trouble mining in Zimbabwe, a proven but largely undeveloped PGM hotspot, and as for South Africa, the global leader in platinum production, power issues and political trouble will keep annual growth to 2 percent – not the 5 percent they’d hoped.

In terms of the auto sector, the FT quoted Johnson Matthey as saying that a big part of the palladium demand spur would be Japanese automakers getting back to full production in 2012. During the ETFS call, Berlin answered questions on China and India’s auto markets, both of which he foresees as continuing their growth in the next few years. China’s domestic auto production still centers on small gas-engine vehicles, which use a greater percentage of palladium; similarly, hybrids use more PGMs as well – up to 20-30 percent more, Berlin said.

So how long will it take to make up the upcoming global palladium supply deficit? Berlin estimates, at the very least, 10 years. If auto production continues remains healthy and rising, what will that mean for prices? You can do