Russian palladium inventory exhausted by 2011?

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PLATINUM GROUP METALSYesterday's Top Story:

Russian palladium inventory exhausted by 2011? - Norilsk
Anton Berlin, Norilsk's marketing director says market consensus is that there will be no sales of palladium for the Russian state stockpile in 2011 and sees the metal sustaining a deficit for the foreseeable future

Author: Rhona O'Connell
Posted: Tuesday , 14 Sep 2010

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LONDON -

Mr Anton Berlin, the Marketing Director for Norilsk Nickel, has noted, in a presentation given at ETF Securities Ltd, that the market consensus is that there will be no sales of palladium for the Russian state stockpile in 2011. While not committing himself to a personal view, he pointed out that while the size of the Russian stockpile, which is held by the Ministry of Finance, is a state secret and that there are therefore no valid data available, annual sales in 2007 to 2009 were a "fraction of historical values" and that this is believed to be an indicator that the reserves are approaching depletion. Two years ago the government announced what it would be selling a quota over the following three years. This has also suggested to some in the market that Russian state inventories are approaching exhaustion.

Independent evidence backs this up, certainly as far as 2009 and 2010 thus far are concerned, although GFMS figures suggest that Russian inventory shipments in the middle of the "noughties" were low and in 2002 the implied figure was a net import.

The significance of this, of course, is that the global palladium market is in a deficit and the shortfall has been regularly made up (and exceeded) by Russian sales from inventory.

Mr Berlin's presentation worked through the fundamentals of the palladium market, noting that Russian production in 2009, at 2.,7M ounces, comprises 42% of the world total, with South Africa at 39% with 2.5M oz. Supply is at the behest of nickel mining in Russia and platinum in South Africa, so growth cannot be "regulated"; only the primary PGM mines in North America are governed by price (Stillwater's revenue, for example, is a 90% function of the palladium price).

Norilsk's production plans are published out to 2025, and there are no plans for any substantial change in either nickel or palladium output. South Africa is looking to increase output and the ratio is moving in palladium's direction as the mines go deeper; ten years ago the Pt:Pd ratio in South African operations averaged 2.1:1; now it is 1.9:1 - but costs are rising as the mines deepen and production has not grown at the rate that the South African miners had originally planned

The only country with tangible upside in terms of output is Zimbabwe, but the political risk inherent in working in Zimbabwe has not gone away.

Therefore Mr Berlin estimates that there is only 10% of output that has the capacity to grow according to market needs and for the foreseeable future the forecast rate of growth is 1% per annum.

The "Mine on the road", however is growing rapidly with secondary supply dominated by the auto sector. and Norilsk's model suggest that the scrapped cars furnishing the return of catalysts for recycling are aged between five and fifteen years, peaking with ten-year old vehicles. He does point out that this is not a precise science given the flexibility of scrap merchants in terms of their feedstock, which can be varied easily according to market conditions.

He suggests that, due to the reduction in loadings onto new cats, the rate of growth of Pd supply from this sector is flattening - although some independent analysts might disagree with this assertion.

Jewellery scrap return to the refined market is relatively small, as much is remelted back into jewellery by the local industry; furthermore there is currently no refinery in China that refines to good delivery bar standard. Electronics is also a very small source of supply given the low unit loadings in electronic components and the associated cost of extraction.

The other source of above-ground stock is the metal held in Swiss vaults, since Switzerland has for some years been the de facto terminal market for PGMs [although this is now changing with clearing switching to London and metal is moving into the UK from Switzerland]. Based on long-term trade statistics, he suggests that there could be roughly 6M oz in vaults - although there has to be a tolerance of perhaps 25% against this estimate as there could be material in a fabrication pipeline - and he also alluded to cross-border trade that may elude customs figures.

He pointed out that Switzerland has been a net exporter of palladium over the past two years, with over 800,000 oz leaving the country in January-July this year , which might at first glance suggest that the metal is being absorbed into fabrication [but, as we note above, this is in part due to the shift to London for clearing purposes].

On the demand side, he reminds us that autocatalyst use is driven by environmental legislation, which now applies almost globally. Platinum group metals remain the only materials that can do the job in the environment of of a car exhaust. Other base metals can effect the necessary chemical reactions, but would not work in an exhaust pipe for purely logistical reasons of space, and not least the required lifespan of an autocats (typically a cat is legally expected to last for a minimum of 100,000 miles). Palladium is the dominant metal for gasoline-fuelled vehicles, especially on smaller engines of 1-1.5 litre capacity. Norilsk is looking for global growth of 5% per annum in auto production for the foreseeable future.

While palladium jewellery Is a small market, he noted that it is spreading into high-end pieces, notably the Swiss watch market and he advocates its use in that it is typically high quality, in excess of 900 fine, (unlike gold's variable caratage), and combines light weight with strength. Norilsk's projected growth rate for jewellery, tellingly, is a conservative zero, which may be a tacit acknowledgement of the struggle that palladium faces against the other white metals.

The electronics sector, which is palladium's second largest end-use, has been growing at 5-8% per annum since 2002 as a result of technological advances. Blu-ray disks and LED panels contain palladium, for example (and scrap recycling rates are generally low). Looking forward, Norilsk's projected demand forecasts are for average growth of 6% per annum for electronics, 10% per annum for autos and 3% in the dental sector giving 6% per annum overall.

On balance, he expects the existing deficit in this market to continue to widen, underpinning investment appeal. He noted that ETC palladium holdings stood at 1.7M oz at the beginning of September. This is equivalent to twelve weeks' demand (basis GFMS figures), and is obviously another source of above-ground stock. But at what price would existing holders be tempted to sell?