If you’re looking for a good commodities play, it’s time you know how to invest in palladium.
Palladium is a rare metal that’s part of a cluster called platinum group metals, or PGMs. It’s 15 times rarer than platinum, and 30 times rarer than gold.
Palladium trades 33% below its all-time high of US$1,125 an ounce, so there’s plenty of room for it to climb just to match that level. And palladium is about to become scarce…really scarce.
Palladium is a widely used metal for everyday items like electronics and jewellery. About 12% of palladium ends up in virtually every kind of electronic device. Your smartphone, flat screen TV, computer, tablet, and DVD player all contain palladium. But by far the most important application for palladium is in the automotive industry.
Fully 67% of all the palladium used each year ends up in vehicles. Some of that is used for the electronics of cars and trucks, but mostly it’s used in emissions control equipment. If you’ve ever wondered why catalytic converters get stolen, it’s in large part because of their palladium content.
Some of these autocatalysts can cost up to $5,000 to replace. More importantly, it’s the growing demand for cars around the world that’s lighting a fire under palladium demand. So much so that supply is simply unable to keep up. In 2011, there were 77 million light vehicles sold worldwide. Last year saw sales of 81 million, and this year is expected to reach 85 million.
By 2018, the world is expected to reach sales of 104 million light vehicles. Most of that growth is coming from China, South America, and South Asia. China is a top auto market and a top auto manufacturer. An increasing number of the vehicles that it produces and sells in domestic and foreign markets are subject to environmental standards.
To comply, these vehicles must be fitted with catalytic converters, which require PGMs. And as many markets, including China, are facing increasingly tighter regulations, more of these metals will be needed.
Looming Palladium Supply Issues
Palladium supply last year fell short of demand by about 915,000 ounces, and this year is shaping up to extend those shortages.
Barclays estimates that 2013 will see a shortfall of 511,000 ounces, and Morgan Stanley expects deficits to persist until at least 2017, with a record annual average price to be set in 2014.
A confluence of factors is setting the stage for the expected shortfalls. In fact, these factors are serious enough that the predicted shortages could easily be much worse than anyone has predicted.
Most of the palladium produced today comes from two countries: South Africa and Russia.
South Africa contributes about 38% of annual worldwide production, while Russia accounts for about 44%. Both have their problems. In the past year, South Africa has been plagued with labour disruptions that have become very serious.
Starting in August, workers at LonminPlc’s Marikana mines went on strike over pay. There were clashes between them and the police, which sadly led to 46 deaths. And the problems continue.
But the biggest wild card is Russia.
Lower ore grades have contributed to falling palladium output from Russia. Norilsk Nickel, the world’s largest palladium producer, is seeing its palladium output decline. Their 2012 output was 2.73 million ounces, but they expect to produce only 2.6 million ounces in 2013. Virtually all Russian-mined palladium is produced by Norilsk, accounting for nearly 44% of worldwide palladium output.
Let’s just say Norilsk knows the palladium market intimately. That’s why it’s all the more important to pay close attention to what Norilsk management has to say.
And keep in mind that Russia not only produces palladium, but also sells palladium into the physical market from its long-running stockpiles. That state repository is called Gokhran.
Almost no one really knows just how much Russia still has at Gokhran.
Back in 2010, as much as one million ounces of palladium were sold from Gokhran, representing 15% of global supply. In 2011 only 775,000 ounces were sold from the stockpile.
Last year, it had dropped by over two thirds to only 250,000 ounces. And this year, it’s expected that Gokhran will only release 150,000 ounces, representing just 2% of world supply.
Here’s how it looks:
- 2010: Gokhran supplied 1,000,000 ounces
- 2011: Gokhran supplied 775,000 ounces
- 2012: Gokhran estimated supply: 250,000 ounces
- 2013: Gokhran estimated supply: 150,000 ounces
- 2014: THERE WILL LIKELY BE NOTHING LEFT AT GOKHRAN!
For years the world palladium market has relied on supplies form Gokhran, but they are now drying up.
Between 2010 and 2013, there will be an 85% drop in supply.
Gokhran was 15% of global supply only a few years ago, this year it may only represent 2%.
According to Anton Berlin, deputy chief at Norilsk Nickel, sales from Russia’s state stockpile is likely to range from ‘zero to several tons’ in 2013.
Palladium supply experienced a deficit of about 915,000 ounces in 2012, thanks to lower supply from Russia and South Africa, plus higher investment and autocatalyst demand amid a fall in recycling.
In contrast, 2011 saw a surplus of 1.26 million ounces. That’s a two million-ounce swing between 2011 and 2012. And the market is about to start feeling it.
Johnson Matthey, a metals refiner and foremost authority on platinum and palladium, meanwhile, forecast an 11% drop in global palladium supply to 6.570 million ounces for 2012, the lowest level since 2003.
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in Money Morning (USA)
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