Palladium Price Set To Go Higher On Supply Shortage

It was another interesting week for platinum and especially palladium. In terms of price action, the strongest of the two metals is undoubtedly palladium. The price of palladium closed the week at $802/oz.

As indicated previously (here, here, and here), both platinum and palladium have broken out of a long trading trange. The following chart shows how palladium is holding up very well above the support line (which once was very strong resistance), and is even building up strength.


On the intraday chart of April 11th, we see a confirmation of the strength as palladium breaks with ease through the 800 level and retreats only slightly.


And this could only be the beginning. Ross Norman from SharpsPixely notes that palladium lease reates are surging. That is not case in platinum. He explains in his latest commentary:

Platinum and palladium lease rates are normally regarded as the advance warning that something is amiss and will invariably presage a move in prices. Platinum borrowing costs are, to all intents and purposes, completely unchanged suggesting that loco Zurich stocks remain plentiful and the market has easily absorbed the mine supply problems. Borrowing costs are currently around 0.28% for the 2 month and the 6 month period.

Palladium however 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 strike-bound). 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.

In the bigger picture, Rick Rule sees the basic law of supply and demand kicking in. As he explains in his weekly metals review, the strikes in South Africa could have taken a lot of metal to “production heaven”, but he is more concerned about the what the current market evolution  says about the platinum and palladium market, which is key for investors to understand.

The workers’ wage and working conditions are deplorable; they have to be paid more. But the industry is not earning its capital. Either the price goes up, or production really declines substantially (not from a strike, but from mines shut down permanently). Where the platinum or palladium price is 2 or 3 months from now is of no interest to me. Whether the platinum and palladium price will get high enough to sustain the current level of production is of much greater interest to me. If that happens, the price will be much much higher than the current price.

Russia is in a different set of circumstances when it comes to palladium. Its biggest producer (Norilsk) is making money at current palladium prices because they also produce nickel, copper and cobalt with it. The problem in Russia is when you go deeper in the deposits. Remember they are producing for 90 years. The platinum and palladium production are in decline. The social, political and financial circumstance of the palladium mining industry in Russia is actually getting better. Above ground supply of palladium in Russia are very opaque; most knowledgeable observers presume that the state controled above ground supply of palladium was depleted a year ago but nobody knows for sure whether that’s the case or not.

On top of that, two palladium ETF’s have been launched very recently, put together in South Africa, which will take a lot of metal out of the market. There is no change in the outlook of decreased production in Russia and strikes in South Africa, two countries which produce combined 70 to 80% of global supply. It makes for a an interesting recipe for palladium in particular.

One final note. David Smith from The Morgan Report has a personal view that palladium will surprise in that it could close the gap with platinum. He explains that there have been two big movements in the PGM complex in the last years. At a certain point, palladium went up till 1050, while platinum reached 2000. Interestingly, these moves occurred separately from each other. So palladium, looking the strongest of the two PGM’s currently, could go higher and faster than most would think.

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