The comments from Anton Berlin, the head of Norilsk's department for analysis and development, that Russian palladium stockpiles might be depleted in one to five years, have prompted a rally in the previously somnolent palladium market. After three weeks of attrition, during which palladium prices drifted down from $455 in the third week of May to touch $420 on June 11th, the comment saw prices jump swiftly to approach $440 on the back of fund buying interest - although it has since run out of steam and is hovering between $435 and $440. Borrowing also appeared in the market, taking the twelve months rate to just over 1% after 70 basis points on the previous close - although 1% for 12 months is hardly a market that is nervous about liquidity or future supply streams.
The reaction in price and lease rates reflect a swift, knee-jerk, response to Mr. Berlin's remarks, but the more measured reaction shows that the market is not unduly concerned about the position. This makes a lot of sense. Furthermore, after the initial response, closer consideration points to the fact that Mr. Berlin actually gave away very little information. One to five years is a massive spread and he also noted that the Russian State would not allow its reserves to go to zero, for simple strategic reasons. In addition the palladium market is carrying heavy inventory, much of it in Switzerland and liquidity is not much of an issue.
Russian stockpiles of palladium have occupied the attention of many an analyst for at least twenty years, as they have been, and remain, a subject of secrecy and the majority of market assessments have had to revolve around trade figures and allied on-the-ground research, predominantly from Johnson Matthey and, more recently, GFMS Ltd. Tables in the GFMS survey of the platinum and palladium markets include a line dedicated to an estimate of identifiable stock movements to and from Russia. From 1999 - 2007 inclusive, the net movement of Russian palladium amounted to 11.4 million ounces or 354 tonnes. During this period there was one year, 2002, in which Russian metal was withdrawn from the market; over the other eight years, inventory movements averaged 1.5 million ounces per annum.
Norilsk's palladium production is forecast by the company to be between 3.02 and 3.07 million ounces this year. Russian inventory shipments since 1999 have therefore been equivalent to almost four years' Norilsk production - or, looked at another way, Russian supplies have been boosted by an average of almost 40% over Norilsk's current production levels.
So how would the market have fared over the past few years if there had been no shipments from Russian inventory? Baldly, although this might seem counter-intuitive given the prominence of the Russian inventory debate, it would still have run up a cumulative increase in available stocks, because of the heavy offloading of automotive inventory in the early part of this decade. After North American auto makers had acquired excess metal in the late 1990s, it then offloaded some 2.9 million ounces between 2000 and 2004.
Without these inventory sales and the sale of the National Defense Stockpile, plus the shipment of Russian stock as part consideration of Norilsk's stake in Stillwater, the market would have consistently been in deficit. From 1999 to 2007 inclusive, cumulative industrial demand for palladium exceeded mine+scrap supplies by 11.5 million ounces (only 100,000 ounces more than the cumulative Russian shipments over the period) and, prior to inventory movements, it will be in deficit again this year. As it is, inventories available to the west have increased by 3.9 million ounces, equivalent to almost six months' demand at current rates.
So, in conclusion: a) the market has plenty of metal available to it - although we do not know at what price inventory holders would be prepared to release metal; b) Russian inventory shipments will continue for the time being; and c) even when these sales do dry up there will be little probability of a massive contraction in liquidity. Barring heavy ETF investment, of course.