by winston » Wed Nov 09, 2016 8:49 am
Palladium Shines
By Eric Fry
Something funny happened on the way to the 2016 presidential election...
During yesterday's trading session, all of the precious metals slumped... except palladium.
In fact, palladium rocketed 5% higher - its biggest one-day gain in nearly a year.
This sparkling performance would have been impressive all by itself. But it was especially impressive alongside the large losses gold and silver suffered yesterday. Platinum also fell. Typically, when the precious metals complex has a bad day, palladium falls in sympathy.
But palladium was utterly unsympathetic yesterday. Instead of falling along with gold and silver, it rallied along with global stock markets.
For this one trading day, palladium behaved like an industrial metal instead of a precious one.
But this industrial metal is becoming increasingly precious.
As you can see in the chart below, demand has been climbing steadily higher for more than a decade, while the mined supply of palladium has been ratcheting lower. As a result, the gap between the two has widened significantly.
Palladium Shortage
Let's take a closer look at the demand side of this imbalance. The story here is pretty simple. The global auto industry consumes all of the newly mined supplies of palladium each year. As a percentage of the total palladium supply, which includes recycled metal, the automotive industry consumes 80%.
Exhausting Supply
During the last 10 years, demand for palladium from the auto industry has more than doubled. And according to Johnson Matthey, palladium demand will continue to climb as global vehicle production increases about 3% per year over the next four years.
China is a big part of the reason why. By itself, China has accounted for a whopping 80% of the growth in global auto sales during the last decade.
And even though the Chinese economic engine has been downshifting for the last several months, auto sales in the country continue to motor along in high gear.
New car sales in China during the last 12 months are up more than 10% over the prior year and double the number sold in 2009.
12 Month Total of China Car Sales
Even after this car-buying binge, the Chinese market is far from tapped out. Only 1 in 10 Chinese adults owns a car, compared to 5 out of 10 in Japan and 6 out of 10 in Europe. So Chinese auto sales are almost certain to remain on their steep upward trajectory for many years.
The resulting demand for palladium is the main reason why the price of this precious metal is likely to move steadily higher. But the fragility of the global palladium supply is the main reason why its price could rocket higher at any time.
Two countries - Russia and South Africa - produce three-quarters of the world's mined palladium supply. Both are struggling to maintain output. Their combined production peaked in 2006 and has been trending lower ever since.
Palladium Production in South Africa & Russia
The slumping output from these two major producers is why GMK Norilsk Nickel PJSC (OTC: NILSY), the world's largest palladium miner, believes the palladium market is heading toward its eighth annual supply deficit in 2017.
Even in the best of circumstances, the mined supply of this essential metal is unlikely to increase over the next few years. But the mined supply could decrease sharply at any time.
2014 provided just a glimpse of how quickly supply shocks can occur in the palladium-mining industry. In January of that year, nearly 70,000 South African miners went on strike at the country's platinum/palladium mines. The strike, which lasted five months, was the largest one in South African history. As a result of this work stoppage, both palladium and platinum posted supply deficits of more than 1 million ounces in 2014.
That strike is over, of course, but South Africa's chronic labor strife is a recurring threat to the country's palladium production.
It bears mentioning that palladium mines are not the only source of supply. If they were, the palladium price would have rocketed higher a long time ago. There is one additional major source of supply: recycled goods, especially of catalytic converters.
According to the latest data from GFMS, newly mined palladium provides nearly 80% of total supply, while recycled metal provides about 20%.
Back in 2009, auto catalyst scrap provided about 16% of total supply. So its contribution has inched up over the years. But since this metal derives from recycled scrap, there is a limit to the supply that can come to market.
Bottom line: It's easy to imagine an intensifying supply and demand squeeze coming our way.
No commodity market can operate in deficit forever. Eventually, the stockpiles become exhausted. Eventually, prices rise enough to dampen demand and "cure" low prices.
This bullish trend appears to be underway, as palladium is up more than 40% from its January low, and the shares of most palladium and platinum mining companies are also up substantially. The stock of U.S.-based Stillwater Mining, for example, has more than doubled since January.
Investors who'd like to add some palladium to their portfolios could purchase the ETFS Physical Palladium Shares ETF (NYSE: PALL). This ETF stores physical palladium in Zurich, Switzerland. It also stores some of its palladium in vaults in London.
Source: The Non-Dollar Report
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