(Kitco News) - Palladium has soared to its highest level in 11 months on worries that any economic sanctions against Russia could disrupt exports of the metal from the world‘s largest producer and exacerbate an already tight supply situation.
The worries come when the market was already dealing with reduced supplies as a result of a nearly six-week-old strike in South Africa’s platinum-group-metals mining sector.
As of 8:57 a.m. a.m. EST, most-active June palladium was up $14.20, or 1.9%, to $778 an ounce on the New York Mercantile Exchange. The metal rose 4.5% so far this week. On a futures spot continuation chart, palladium was as high as $783 an ounce, a level not seen since last April. MKS (Switzerland) SA said the metal this week broke above a downtrend line that previously held six times since August 2011.
Platinum is also stronger, with the April futures up $19.50, or 1.3%, to $1,483.80. The contract peaked at $1,485.70, its strongest level since September.
Western nations have threatened possible sanctions against Russia over tensions surrounding a Russian military threat in Ukraine’s Crimean region.
“The main reason that palladium has seen a pretty strong rise has been the concern that trade sanctions may be put on Russia if the situation in the Ukraine deteriorates from where we are today,” said Nicholas Brooks, head of research at ETF Securities.
“That could constrain their ability to export palladium to the world market. Russia produces around 41% of the world’s palladium, so that could have a huge impact on the supply/demand balance,” he said.
This comes at a time when PGM output has already been dented in South Africa by strikes against the country’s major producers. South Africa is the world’s second-largest producer of palladium, and No. 3 is far behind.
Peter Hug, global trading director for Kitco Metals, said PGMs were expected to be in a supply deficit this year even prior to the South African strikes. “This group has a propensity to surge to outlandish price premiums, in times of physical shortages,” he said.
In fact, there already is a several-dollar premium for “sponge” in both platinum and palladium, said a North American trader in the physical market. Sponge is metal in powder form used for industrial purposes.
“With the two largest global suppliers facing all of these tension – strikes in South Africa and possible sanctions against Russia – there are a lot of investors...piling money into palladium on the off chance that supplies are going to be at a premium,” the trader said.
The Platinum 2013 Interim Review from Johnson Matthey listed Russian palladium primary output last year at 2.6 million ounces, with the country estimated to have released another 100,000 in stockpile sales. South African palladium output was estimated at 2.35 million ounces, with North American production No. 3 on the list at 930,000.
UBS analyst Joni Teves said in a research note that much of the move higher in palladium was initiated by options-related activity, with interest for three-month $800 calls evident on Tuesday.
“The extent of the palladium move suggests that the market believes that trade sanctions against Russia are a real possibility,” she said. “Should this materialize, then the current price...undervalues palladium, and a price closer to $1,000 is more appropriate.”
However, Teves and Brooks both said it can be tricky trading a metal that is making big swings in the short term due to geopolitical events, as is currently happening with palladium. Presumably, there could be a pullback if any sanctions against Russia that are feared by the market do not materialize, they said.
“Trade sanctions amount to an extreme reaction, and are by no means a certainty,” Teves said. “Headline risks abound, and signs of a resolution could prompt a swift unwinding of recent palladium longs.”
Nevertheless, Brooks described himself as bullish on palladium for the long term, with auto sales expected to be strong in the key markets of U.S. and China. The metal’s main industrial use is auto catalysts, in particular for gasoline-powered vehicles that dominate the U.S. and Chinese markets.
“At the same time, there is constrained supply, even before this conflict in the Ukraine,” Brooks said. “In 2014, we’ve been estimating a quite large supply deficit. This should be price supportive.
“Also, in our estimates, the palladium price has been trading – along with platinum – well below the marginal cost of production.”
This, Brooks said, means higher prices will be needed to “tantalize” producers into increasing output.
By Allen Sykora of Kitco News; firstname.lastname@example.org