Sunday, July 8, 2007

The mystery around the Russian palladium stockpile

In early 2003, the Head of Commodities Research of HSBC Investment Bank, Mr. Alan Williamson, gave a presentation on Russian PGM stocks. Through careful analysis of available data he believed the Russians had a 10 to 12 million ounces palladium stockpile, and very little platinum left, at that time. He painted an absolutely grim future of palladium price movement: "fundamentals of the (palladium) market look almost unreservedly grim, even allowing for a switch from platinum into palladium in the autocatalyst sector. We expect the market to move into structural oversupply, with ongoing downward pressure on prices as a result."

Of course, he is proven completely wrong today. Palladium price bottomed in 2003 right around the time of his presentation, at about $145, it then rallied in the next four years and almost tripled by today at $370. Curious though, all the supply side bearish facts he cited in 2003, were absolutely true, but the bearish prospect did not materialize. I guess that is because it has been extremely bullish on the demand side, on both industry demand and investment demand!

The author concluded in 2003 that there will be an over supply of palladium, due to the dumping of the 877169 ounces palladium that SWC received from Norilsk in 2003, and new mines in South Africa. He concluded that for price to remain stable instead of falling further, the Russians must purchase and re-stock more than 1 million ounces of palladium per year.

What really happened was the Russians have been selling off their stockpile at about 1.8 million ounces per year, in addition to any new mine production, and SWC sold out all of the 877169 ounces of Norilsk palladium between early 2004 and early 2006. With this huge presumed "over-supply" of palladium, the metal price instead rallied big time? What gives? It must mean there is a huge demand sucking up all the over supply and drive up the price!!!

What happens now? The SWC selling off of Norilsk palladium, which supplied about 7% of the global demand, had been completed in 2006. And if the Russians had 10 to 12 million ounces stock pile of palladium in 2003 and has been dumping at a pace of 1.8M per year, they probably still have about 3M or 4M left. It won't last very long until it is completely depleted. Or if the Russians are rational and they do not want to run empty, they would now start to cutback or totally cut off the selling of their stockpile, or even start to re-purchase and re-stock!!!

If palladium has seen a price rally in the past four years amid the selling off of SWC Norilsk palladium at 0.5M per year, and the Russian dumping of 1.8M per year, totalling 2.3M "over-supply" per year, what would happen when this "over-supply" is removed from the market?

It would drive the metal price sky high!!!! And it would be an extremely bullish development for SWC share holders. - Pallalunar


JJ2000426 said...

This recent article discusses CPM forecast of platinum and palladium supply and demand for this year.

CPM predicts palladium supply to be 8.884M ounces, while palladium demand will be 8.226M ounces, leaving a surplus of 0.658M ounces, less than last years.

Of course this 0.658M "surplus" is possible only if the Russians continue to dump 1.6M to 2M government stockpile of palladium to the market, each year. Without Russian stockpile selling, there would be a large shortage of palladium, not surplus.

JJ2000426 said...

Various web documents:

Jeffrey Christian on Dec, 2005: A Rational Alternative to Commodity Supercycle Theory.

A couple dozen experts making their bets: LBMA Precious Metal Forecasts of 2007.

An article talking about a large Russian shipment of palladium to Swiss in December, 2006.

A very long USGS 2004 document discussing world palladium supply and demand.

Reference one of my old blog entries for past Johnson Matthey annual report on platinum and palladium.

JJ2000426 said...

Another web document containing useful information.

The Johnson Matthey report says Russia exported 4.62M ounces of palladium in 2005 and 3.9M ounces in 2006. Mine production was 3.15M. There was also a shipment of 1.29M ounces to Switzerland in December, 2006, which was nout counted in the 2006 export number.

Therefore I conclude the actual Russian export in 2006, if counted in this 1.29M shipment, should be 3.9M + 1.29M = 5.19M. Minus mine production of 3.15M, the portion of export that came from goverment stockpile is 2.04M ounces in 2006.

JJ2000426 said...

Another old article in 2004. Is Palladium Set For a Comeback?

Note to self: As the Russians ship their government palladium stockpile to Switzerland, and the Swiss banks mint those palladium into PAMP Swiss palladium bars and sell to the public at a premium. This part of supply is forever removed from industry users, unless they one day start to melt down those nicely minted bars.

JJ2000426 said...

Kitco exclusive by Michael Checkan on Feb 23, 2006: White Metals Offer White-Hot Opportunities

GoldMasterUSA, Financial times Gold book is forecasting Platinum and Palladium to explode out of the gates in the near future

Orsa Maggiore said...

Hi JJ, as promised, I made some research on russian findings here:
Your points on this matter have been a good stimulus for my research

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