30 November 2018
PALLADIUM SUPPLY AND ITS ABILITY TO RESPOND TO A SOARING PRICE
It may appear surprising that palladium prices have almost tripled since the start of this decade, but supply in 2018 is only looking at a rise of just over 10% since 2010. It therefore seems worthwhile to present our latest findings on palladium supply and assess whether this structural lack of price response can change. This article also provides some background, which we hope will be of use to those less familiar with palladium.
It is important to note that palladium is mined in polymetallic ore bodies with the metal forming only a portion of total mine revenues. As such, mining operation’s economics are limited in their exposure to the rise in palladium price. For the largest palladium producer, Nornickel, palladium represents 36% of total metal sales revenue. This week, the company reiterated an essentially flat production profile out to 2020. In lieu of additional mine supply the company is releasing stocks accumulated by its Global Palladium Fund.
Over the next five years, we continue to forecast only a limited supply response from South Africa, with additional ounces from the five growth projects in our data-set offset by cost driven closures at Implats and Lonmin. Platinum forms a larger share of these operations’ revenue and thus the fall in platinum price has mitigated the benefit of rising palladium revenues. The palladium-rich ore bodies of Sibanye’s US operations and North American Palladium’s Lac des Iles have meant that both operations have benefited and each is pursuing growth. However, the 250koz additional contribution to North American production in 2021 will be partially offset by losses from Vale, which produces palladium as a by-product of nickel mining. This highlights why it is necessary to view palladium production in the context of the PGM basket price. For most operations, the decline in the platinum price has mitigated the rise in palladium. As a result we forecast global palladium production to decline by 2% to 6.7Moz next year.
The second key area of supply is recycling, accounting for around 30% of the total. As a reminder, our recycling data only covers open-loop volumes, or those potentially susceptible to price moves, which covers jewellery, electronics and the dominant area of automotive catalysts.
The niche of recycling of palladium from jewellery has been stable of late, in part as it is far less price responsive than gold. A key reason for this is that the bulk of palladium use today is in white gold alloys and such pieces are typically high margin gemset and/or bridal and so rarely melted down. Carat palladium jewellery is also less likely to be scrapped, as almost all of its use today is in western bridal jewellery. Electronics scrap has actually been trending down over the last decade, with 2018 volumes set to fall by 4% y/y to a level some 30% below volumes in 2010. This purely reflects declining historic fabrication, as use in such areas as MLCCs swung to nickel. Our feedback from e-scrap refiners is that palladium prices remain irrelevant, and it is common to receive material yielding no palladium.
As implied in the chart opposite, historic offtake is the key driver of autocat recycling. This meant that 2018 should have seen a clear y/y lift. However, our initial suggested research this would not occur due to the heavy release of inventory in 2017. This in turn reflected the large volume of material stockpiled in 2015 and 2016, due chiefly to the slump in steel prices. That left consumers baulking at having to pay for a vehicle to be scrapped and collectors when possible held off from processing. The low price of palladium at the time was just an extra disincentive. Recent research, however, points to autocat recycling this year proving stronger than expected; research is ongoing but, when results are next released (in our 5-year forecast), they could show a slight y/y rise for 2018. Firmer palladium prices have helped, but more important are other factors such as growing volumes from hybrids’ high yielding catalysts and, in the US, talk of consumers feeling sufficiently confident to scrap an old car and upgrade to a newer one.
Even with this upward revision to our autocatalyst recycling series, palladium will remain in a substantial deficit this year and for the foreseeable future. Furthermore, nothing in our recent findings suggest any structural change in any area of supply in terms of their becoming more price responsive and so able to alleviate these deficits, at least during the period covered by our 5-Year Forecast.
Despite sanctions, outlook for Russian mining & retail investment remain positive
Last week, Metals Focus spoke at the 13th International Forum, RBF-2018 in Moscow, organised by the National Finance Association. Both the event and our research meetings conveyed a sense of optimism about the outlook for precious metals in Russia, in spite of the ongoing sanctions. Arguably the most important sector in the Russian precious metals sector concerns mining. In this regard, it is worth remembering where Russia ranks globally for each metal. Looking first at the PGMs, Russia is the largest palladium producer, with an estimated 2.7Moz of production in 2018, while for platinum ranks second with an output of 700koz. Turning to gold and silver, Russia is placed third globally with an estimated 9.2Moz of gold production in 2018, and fifth for silver with around 34Moz of mine supply this year.
One theme that emerged from our meetings, especially concerning the gold market, were the opportunities to further grow output production domestically. One factor lending some support is that, during the Soviet era, the country’s mineral resources were extensively documented. But many large-scale mining projects located in remote areas of Russia sat on the back-burner for decades partly due to a lack of infrastructure and disagreements over ownership. Only now are the likes of Polyus Gold and Baikal Mining developing huge projects like Natalka, Sukhoi Log and Udokan, which will open up these highly prospective, under-exploited regions. Today, there appears to be a strong appetite to further exploit these assets, although sanctions have impacted the industry’s ability to raise capital. That said, there is still interest, especially among the larger Russian gold producers, many of which can instead be financed domestically. With the support of Russian banks, domestic miners are increasingly focussed on looking for M&A deals, especially to help develop operations that are close to first pour (as opposed to riskier early stage projects).
Away from mining, one issue discussed at the Forum was for gold bars to become VAT-free (currently 18%, rising to 20% in 2019). At present, retail gold demand in Russia is small, at no more than 3t per annum (the VAT imposition often sees gold bars bought as a gift, not for investment). As a result, during periods of uncertainty retail investors tend to buy foreign exchange. For those looking at gold the only tax-free option seems to be unallocated gold. Holdings in Russia are around 50t, but the total has fallen over much of this decade. Although several hurdles still exist to introduce VAT-exempt gold, the debate in Russia has advanced far more than on previous occasions, now involving the State Duma and Ministry of Finance. While bar demand is difficult to predict, should the VAT proposal succeed, the deep involvement of the Russian banking sector in the Russian gold market should create a platform from which to sell gold products nationwide.