Palladium prices hitting new highs

A rare combination of ongoing strikes in South Africa’s platinum group metal mines combined with political tensions between Russia and Ukraine have translated into three-year highs for palladium prices in early June, resulting in one of the few bull markets for a mining commodity this year.

The six-month spot price chart is particularly compelling for palladium bulls, showing a steady march upwards from US$700 per oz. in early February.

At press time, intraday palladium spot prices were touching US$860 per oz. in New York trading. Palladium prices are poised to close above US$855 per oz., which would be a 14-year high, bested only by the spike in 2000 that saw palladium prices soar well above US$1,000 per oz.

All of this is in contrast to palladium’s flashier siblings in the precious metals family, with prices for gold, silver, platinum and rhodium all flat this year.

Russia and South Africa are ranked first and second in terms of global palladium production, with Russia’s output a by-product of nickel–PGM mining in the Norilsk mining camp and South Africa’s a by-product of platinum mining in the Bushveld igneous complex.

While the concern over Russian supply is related to potential economic sanctions from Western countries as retaliation for its treatment of Ukraine, the palladium supply contraction out of South Africa is ongoing, with no resolution in sight.

The strike by 70,000 platinum workers has already lasted 20 weeks — the longest in the country’s history — and wage negotiations have broken down again at press time, with the government’s representative withdrawing as a mediator.

The strike has idled 60% of South Africa’s platinum mining capacity, and has played a large part in South Africa’s economy shrinking 0.6% in the first quarter of 2014. It’s the first contraction in gross domestic product since 2009 for South Africa, and another quarter of decline would mean the country is technically in a recession. With no quick strike resolution in sight, the official designation of the economy as being in recession is virtually guaranteed.

Those closely watching the situation say the country’s platinum mining companies — dominated by Anglo American Platinum, Impala Platinum Holdings and Lonmin — will use the platinum strikes as a catalyst to carry out radical restructuring of South Africa’s platinum industry with an emphasis on greatly increased mechanization to reduce the workforce and increase productivity and profits.

The platinum mining companies claim the strike has cost it US$2 billion in lost revenue and cost the miners US$920 million in lost wages.

At the same time, however, the leadership of the platinum miners’ union, the Association of Mineworkers and Construction Union, has become more aggressive and is pushing to introduce similar wage demands and labour-disruption tactics into South Africa’s gold mines — moves that have so far been blocked by South Africa’s Labour Court.

It’s remarkable that all this turmoil in a country that produces just over half of the world’s platinum has not translated into much stronger platinum prices, but such is the general weakness of current global platinum markets.

While palladium supply is getting crimped, the demand side of the equation is also a driver, with demand from the auto sector in the U.S. and China picking up. (Palladium is used in catalytic converters used in gasoline engines which are most popular in the U.S. and China, while platinum catalysts are best for use in diesel-powered vehicles, which are favoured in Europe.)

While an uptick in vehicle sales in the U.S. and China is one factor, the Chinese government’s gradual tightening of auto-emission pollution regulations points to increased use of palladium per Chinese vehicle.

With the wind in palladium’s sails, speculators are also starting to step in with large purchases and subsequent hoarding of the metal.