Friday, April 11, 2014

The big palladium rally is finally under way

Market watchers have been calling for a spike in the price of palladium and platinum for weeks.
That's now finally beginning to happen.
Palladium futures trading on the Nymex in New York broke through the $800 an ounce level on Friday touching a day high of $812 an ounce, the highest since August 2011 and up 5% since Monday.
In early afternoon trade the precious metal had eased back to $804.50 an ounce, up nearly 12% since the start of the year.
Platinum continued to underperform its sister metal however and July delivery contracts were static on Friday at $1,4590 an ounce. Platinum is up 6% in 2014, but down $85 compared to this time last year.
Chief among the factors pushing prices higher are the strike at South Africa's PGM mines and the stand-off between the West and Russia over Vladimir Putin's adventurism in Ukraine.
South Africa and Russia combined account for some 70% of world platinum output. Platinum production is even more concentrated with close to 80% of global supply of palladium coming from these two countries with Canada a distant third.
Palladium is mainly used to clean emissions in automobiles and as a substitute for pricier platinum in auto catalysts.
Apart from the dicey supply situation, demand is robust with number one PGM consumer, the European auto industry in full recovery mode after falling for six straight years and car production soaring in the rest of the world.
Global auto assembly lines are forecast to push out a record 72 million cars this year
Global auto assembly lines are forecast to push out a record 72 million cars this year – versus an average of 50 million between 2000–2010.
Another factor boosting the the palladium price was the launch of two physical palladium-backed exchange traded funds in Johannesburg, South Africa, late March.
Holdings in the new palladium funds on Johannesburg Securities Exchange enjoyed inflows of roughly 270,000 ounces or 7.6 tonnes during only the first two weeks.
Taken together with the impact of the Anglo American Platinum (LON:AAL), Imapala Platinum (OTCMKTS:IMPUY) and Lonmin (LON:LMI) strikes some 750,000 ounces have been taken off the market over 11 weeks since the labour action began.
That compares to annual global mine production of 6.4 million ounces and scrap supply of 2.4 million.
London-based precious metals broker Sharps Pixley CEO, Ross Norman, argues in a note on Friday based on lease rates palladium could be ready for a significant rally:
"Palladium [...] is just starting to respond. The two and six month rates have doubled from 0.25% to 0.5% but in general terms remain 'affordable'. With old Russian palladium stocks said to have been largely exhausted about a year ago, the market demand has hitherto been satisfied from current production until now.
"The oddity about this however is that palladium is responding and not platinum given that South African production is predominantly platinum (which is strike-bound) whereas palladium is predominantly from Russia (which is not…). It remains to be seen whether this is an extension of the Russians withholding gas to Europe story or whether this is a genuine supply issue – either way, palladium may just be primed for a roller-coaster ride."
An Opec-style organization should be set up
To further support prices, South Africa's state pension fund manager – echoing sentiments expressed by the country's mines minister – suggested last week an Opec-style organization should be set up between producing countries to control supply.
The idea has been met with skepticism due primarily to the negative impact on jobs if and when mines are idled to curb supply. BDlive quotes Cadiz Corporate Solutions mining analyst Peter Major as saying this ship has sailed for PGMs:
"Great idea, but it should have been done a long time ago, as De Beers did with the Russians on diamond sales. Today, there are some downsides such as, for example, you might get caught. Such an arrangement would break every rule in the World Trade Organisation book."

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