Secret Russian Palladium Stockpiles Dwindle & May Disappear In Near Future, Supporting Prices

 @natrudy
on December 06 2013 8:57 AM
Norilsk Nickel facility in Russian Arctic city of Norilsk
Norilsk Nickel facility in Russian Arctic city of Norilsk Denis Sinyakov /Reuters

Sales of palladium stockpiles secretively held by the Russian government could end by 2014 according to top Russian precious and base metals miner Norilsk Nickel (MCX:GMKN).

That supply pressure is bullish for palladium prices, which many analysts expect to rise next year thanks to a robust U.S. and China automobile market.

The Russian finance ministry used to deliver as much as 2 million ounces of palladium onto the market annually, according to a Norilsk Nickel presentation at a recent precious metals conference.

That has dwindled to less than a million ounces in 2010. Only 100,000 ounces of palladium – used mostly in automobile parts and less commonly in electronics and jewelry – is likely to be delivered by the government in 2013, the industry expects.

Information about the precious metal stockpile is considered a government secret, so data on the amount of stocks left is hard to obtain. Export statistics can provide a clue, but the government neither confirms nor denies any conclusions drawn from those figures.

“In the last couple of years, the stream has become really thin,” said Norilsk Nickel market strategist Anton Berlin in New York on Thursday. “We view this as a very good indication that the stockpile is depleted. And we don’t expect that the Russian government sales will have any influence on the market this year or in any following year.”

Above-ground stocks of Russian palladium often plug the gap between strong palladium demand and stagnant mining supply. Metals researcher Johnson Matthey PLC (LON:JMAT) earlier forecast a palladium deficit of 740,000 ounces in 2013, also citing low Russian stockpile sales as a key factor.

Norilsk Nickel is a major global miner of palladium, with the mining of platinum group metals like palladium making up a third of its business. It doesn’t sell palladium to the Russian government.

Another opaque source of already mined palladium are the estimated 4 million ounces held in Swiss bank vaults, said to be the largest above-ground palladium stocks in the world. But the exact size of those palladium stocks is also a mystery, since the banks aren’t required to disclose their holdings. Berlin noted that the margin for error in estimating the size of those stocks is plus or minus 1.5 million ounces.

Still, Swiss customs data indicate that Swiss stockpiles have been increasingly used to plug palladium deficits, likely since 2009.

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Berlin cautioned in an interview with IBTimes that there’s no hard confirmation from the Russian government on the depletion of their stockpile. But he added that the precious metals market has known about dwindling sales for years, and that Russian sales won’t majorly influence the market in the future.

“With [Russian] stocks now minimal this source of metal will no longer play any significant role in determining the overall market balance,” wrote Johnson Matthey analysts in a precious metals outlook for 2014.

There could be a further palladium deficit of 1.06 million ounces in 2014, according to HSBC Holdings Plc (LON:HSBA) precious metals analyst James Steel. Steel also expects Russian mining output to fall.

“We believe Russian palladium stocks – built up during the cold war – are greatly diminished and may be nearing exhaustion,” wrote Steel in a Nov. 22 research report. “The widely accepted view it that these stocks could be completely exhausted by end-2014.”

Both platinum and palladium are expected to benefit from strong sales of vehicles, as the two are used in catalytic convertors, Johnson Matthey manager Jeremy Coombes told IBTimes.

Johnson Matthey is equally bullish on platinum and palladium given these fundamentals in the auto market, said Coombes. Johnson Matthey makes autocatalyst, which contain both key metals, and also refines, recycles and distributes platinum group metals generally.

Norilsk Nickel also sees a long term structural deficit in palladium. Even if probably mine projects are developed, a heavy burden for hesitant mining companies, yearly deficits of up to 1 million ounces could be seen out to 2025.

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Palladium opened at $734/oz in New York on Friday. Coombes sees prices potentially rising to $780/oz in 2014. Steel forecasts palladium rising to $900/oz by 2015.

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