HardAssetsInvestor

Written by Julian Murdoch  |

March 07, 2011

Platinum & Palladium: The New Normal?

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Without that oversupply created in 2009, platinum prices would have risen much higher last year—a scenario that played out in palladium:

Source: ETF Securities Platinum and Palladium - 2011 Outlook and Fundamentals

Palladium supply contracted by over 10 percent in 2008, and dropped another 4 to 5 percent in 2009. Demand also contracted, but not as sharply as supply. Thus, when demand for palladium rebounded sharply in 2010, it quickly outpaced supply, and prices rose accordingly.

Supply Constraints

Supply of both metals comes primarily from mining output in South Africa and Russia, with South Africa producing roughly 76 percent of all platinum and 35 percent of all palladium. Russia, meanwhile, supplies only 13 percent of platinum, but is the world's major palladium producer, supplying 52 percent of the metal. Mining supply of both of these metals has been constrained for a variety of reasons.

In South Africa, one of the main problems has been power—or the lack thereof. There just hasn't been enough steady electricity to meet mining industry needs. A new power policy is expected to be in place in South Africa by April, but it will still be a number of years before new capacity comes online. Eskom executive Kannan Lakmeeharan said that the supply-demand margin for power in South Africa will remain slim for the next five to six years, with the next two years being particularly tight. Not good news for mining production in the short run.

For Russia, figuring out the supply picture is trickier, because much of the palladium coming out of the country has originated from national stockpiles—and stockpile levels are considered a state secret. However, to get some indication of Russian inventories, the industry instead watches what gets sold in Switzerland—it being one of two major cargo hubs for the metal—and signs there suggest Russian stockpiles might be getting low. Last year, shipments from Russia to Switzerland dropped 12 percent, falling to 500,000 ounces, according to customs data reported by Bloomberg.

With palladium stockpiles most likely decreasing in Russia, and mine production forecast to decrease over 5 percent in 2011, palladium's supply picture thus remains tight.

David Davis, a mining investment analyst at Standard Bank's SBG Securities (Pty) Ltd, was quoted in Bloomberg as saying, "The palladium market, excluding any Russian stockpiles coming in, is going into an ever-increasing deficit. It'll put upward pressure on the price."

But just how high can the metal go? That depends on tomorrow's demand.