Are palladium stockpiles running out?

About 45% of annual global supplies come from Russia. In recent years, about two thirds of Russian supply was newly mined, with the balance coming from stocks. Between 2005 and 2011, Russian exports from inventory averaged 900,000 ounces per annum, or about 11% of total world demand. In 2012 that number shrank to about 250,000 ounces, representing only 3.3% of global demand. Although the actual size of the Russian stockpile is a closely guarded state secret, industry analysts believe that there are little or no stocks remaining.

There are new mining projects that will eventually produce more palladium, but we are talking about 10 years down the road.

To complicate matters, serious labor strife in the world’s second largest supplier has debilitated some key mines in South Africa. Strikes at Anglo American Platinum Ltd. mines have caused the company to pare back production, eliminating a significant amount of production from the market. The company is in talks with the government about closing some mines indefinitely, but either way, supply will be curtailed for the foreseeable future.

As a result of these supply issues and growing demand, there was a global supply/demand deficit of 915,000 ounces in 2012, a complete turnaround from a 1.26-million-ounce surplus in 2011.

Palladium prices have increased substantially vis-à-vis platinum prices since mid-2009. Where substitution is an option and the cost is an issue, platinum might have priority. Chart 2 shows that palladium prices were much higher in the early 2000s, but then again, the explosive growth in auto catalyst demand may have only been facilitated by much lower palladium prices we saw between 2003 and 2009. So demand could prove to be elastic to some degree, especially if prices continue to rise.

We believe, however, the recent selloff was an overreaction to the general drop in metal prices. The instability of supply lines from both Russia and South Africa remains the dominant issue. South African mine production will not grow anytime in the near future. And if Russia has indeed depleted its stocks, we will be looking at another global supply/demand deficit in 2013

Prices will need to move much higher to incentivize infrastructure investment. Even so, in the near term, supplies will remain very tight, and we expect prices to rebound back to the highs and beyond.

Buy June palladium. Places sell stops at $650 per ounce, basis June, close only. This is a very illiquid market. We recommend a conservative trading approach.

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