Palladium Observation - TWO WORDS: Russia & Carmakers

Palladium prices are very sensitive and the key to their price movement lies in two major factors.

Palladium is just one of those overly sensitive commodities and this is due to being heavily dependent on two very specific things: Russian stockpiles of it and demand for it from automakers. Bill O’ Neill, one of the principals with LOGIC Advisors, states, “It is a very thin market, so if there is a supply disruption, it doesn’t take a lot to get the market moving.”

Russia, being the number one seller or provider of palladium, is the prime suspect that one must investigate when gauging the supply of palladium. According to O’ Neill there is mounting evidence that, “…Russian supplies are dwindling and we’re going to see some supply tightness in the market…Russian supplies are really the key to the rally.”

Norilsk Nickel’s director, Anton Berlin, had a much more bold opinion on Russia’s supply. Berlin stated that his company believes the Russian stockpiles are, “almost depleted” and cited news reports from earlier this year quoting a supposed government source claiming that Russian exports would drop as much as 150k ounces annually for both 2012 and 2013. These are some pretty bold words, but if they are true, then we could see some major shortages as early as next year and THAT could work miracles on palladium prices. However, it would be foolhardy to blindly follow such speculation without knowing what Russia’s actual stockpile is, but unfortunately, the Russian government does not give out this sort of information.

Now on the demand side of palladium it is imperative that one observe auto sales because palladium prices are largely driven by industrial demand. Palladium, as well as platinum, is used to manufacture catalytic converters (devices that reduce toxins in car emissions) for automobiles. O’Neill mentions that the improved auto sales figures in the U.S. are behind the recent rise in palladium price – there was a seasonally adjusted annual rate of automobile sales in November of 13.6 million units; up well over a million from 12.28 million in November 2010, per Autodata on December 1st. And that’s just the U.S.

China has quickly become the world’s largest auto market and analysts from Barclays Capital are saying that there are indeed signs of strength in Chinese auto sales. According to LMC Automotive Ltd., a research company based out of Oxford, England, global car and light-vehicle purchases will climb to a record in 2012.

Jim Steel, a precious-metals analyst over at HSBC, cited ideas in the marketplace, stating that there is a continuing shift in which automakers are trying to use more palladium in catalytic converters, whenever possible, rather than the more-expensive platinum.

Unfortunately, despite this optimistic information on auto sales, I HAVE to mention the elephant standing in the room – Europe’s debt crisis. If Europe’s automotive industry can get negatively and heavily impacted enough, then China and the U.S. will have to pick up the reins and show even greater expansion just to get a positive global sales figure.

All in all, it looks pretty bullish for platinum in the long run, but rather uncertain in the near term, especially given the two important European meetings occurring tomorrow and Friday.

Stay sharp!

- Peter