Palladium Fundamentals - History and Future

We know SWC is the only PGM (Platinum Group Metal) producer in the USA. The future prosperity of this company solely depends on the future prices of palladium and platinum. For the trailing previous 4 quarters, SWC had a sales revenue of $664M but an insignificant net profit of $6.1M, the profit is less than 1% of the sales revenue. That's $7.22 sales revenue and $0.066 profit per share. If the PGM metal prices double or triple, the sales revenue will double and triple, with a great portion goes into net profit. The current P/E ratio of 142 could easily drop to 0.43 if the sales revenue quadruple as the metal price quadruple, bring in $28.88 sales revenue and $21.73 net profit per share.

Let's look at palladium's supply/demand fundamentals. Let's look at history and then give a prospect of the future. On this, Orsa Maggiore did a fantastic job digging out and analysing the data. I encourage you to read his blog articles first, before even continuing read my discussion here. He also has another blog Value Area, which I highly recommend, too.

The most amazing thing of the palladium history in the past few years was the spectacular failure of virtually ALL famed metal market analysts to predict the bullish movement of palladium off its bottom of $142 in mid 2003. Look at this 5 year palladium price chart. And then read how analysts predicted a collapse in palladium price since 2003:

Alan Williamson, 2003: Russian PGM Stocks "palladium market, where the fundamentals of themarket look almost unreservedly grim, ...We expect the market to move into structural oversupply,with ongoing downward pressure on prices as aresult." Really?

Alan Williamson, Mar. 24, 2004: Palladium prices shoot past analysts' forecasts "Alan Williamson, an analyst for HSBC, said palladium's time in the precious metals spotlight might end in the second half of the year." Really?

Other metal analysts have not done much better than Alan Williamson either. I am not trying to pick on these highly positioned analysts. They have their decades of experience and have way much better access to market data, their bearish predictions are based on solid data that seem to be correct, and demand respect. However of all these people's predictions were proven wrong, they must have missed something very important! So what they are missing?

All those analysts blame the failure of palladium to follow their bearish prediction on speculative buying from speculative commodity investors, bidding up metal price. But speculators do not just buy, they also sell. And speculators also do read analyst reports. A reasonable speculator in 2003 would probably read the well published Alan Williamson report, and decide to stay away from palladium due to the consensus bearish outlook. True there has been very strong investment buying of palladium, but those buying must NOT be average speculators, but some one who has done in depth market research, some one who look right through the perceived "suply surplus", and see beyond the inherit structural deficit of palladium in reality, and emerging huge new demands on palladium. The investment buyers of palladium are some one who are really looking at long term gains, and will not sell easily because some temporarily market ups or downs. They see a way much big picture than most analysts can see.

It's true that the Russian government has been dumping large amount of palladium stockpile onto the global market, stockpile that was built up during the Soviet Era when they produced more palladium than they needed. This Russian dumping masks the real market fundamental, which is a structural deficit, not a surplus. Without Russian stockpile sale, existing mine production and recycling simply can not meet existing industry demand of palladium. Emerging new demands in areas like palladium jewelry, fuel cell for mobile electronic, and even cold fusion, will create an even more acute shortage situation, possibly drive the future palladium price to a much higher level. The good news is the Russian stockpile is of limited size. When it's depleted, then there will be no more for sale. The complete depletion of Russian stockpile probably already occured, or will happen very soon. Or the Russians may decide to keep the last bit for themselves.

No other country besides Russian has any stockpile of palladium at all. That may change. Palladium is just such an important strategic metal that nations in the world simply can not be without it! Think about China, India, Japan, or even the USA. Once the Russian extra supply ended, won't these countries suddenly realize that they NEED to have a strategic stockpile of these two important metals, platinum and palladium, and rush in to buy in a hurry to try to hoard up some? That will start a bidding war and drive the PGM price to crazy levels.

The United States of America once had a fairly sized strategic stockpile of platinum and palladium, but for some reason sold out some years ago. Please write to your Congress representatives and urge them to consider re-establish the strategic stockpile of PGM metals. It is so important that interruption of PGM supply could have catastropic consequences and pose direct threat to the very survival of the nation. If you are from China, Japan, India, or other large countries, you also need to urge your governments to consider establish strategic stockpiles to prevent unexpected interruption of supply of this limited resource.

Some readings:

A slightly old article: A pair of palladium plays.

The palladium Good Old Days of 2000.

Palladium in 2002, from a Russian point of view.

May 17, 2002: Important question: Fuel Cells: Where Will the Platinums Come From?(new link)

June 16, 2003: Bush and Putin talked about Norilsk take over of Stillwater Mining.

April 20, 2005. John Tyler: Palladium Checkmate...or Russian Roulette.

Spring, 2006. Rebecca Osakwe: PEM Fuel Cells and Russia's Supply of Platinum. Trading One Bottleneck For Another?

June 30, 2006, Scott Wright of ZEAL: Palladium Fundamentals, a must read!

Oct. 16, 2006: The University of Iowa Henry Fund Research Report on SWC.

Jan. 17, 2007: Forecast of 2007. Analysts Take of Precious Metals in 2007.

Sep. 10, 2007: Metals - Russian mining pushes globally.

Latest on Bloomberg: Norilsk Sees Ample Palladium Supply, Lack of Investor Demand. Really? It's so funn I can't help laughing while reading it.

Update: Fun to watch. Jim Roger mad at the Fed.

Cold Fusion article from India: Is there a third route to produce nuclear energy?

A London Bank invests in palladium.