Early April, we reported that HSBC’s James Steel and his team were bullish on palladium prices where global supply is constrained. Steel was expected palladium average prices to reach $825/oz in 2014. This limit was reached last Wednesday and again today.
Tensions in Eastern Europe continue to garner attention in the commodities space. While safe-haven demand has likely helped support gold and silver prices, concerns over supply constraints on Russian exports may help explain platinum and palladium’s push higher. Russian production of palladium accounts for roughly 44% of global supply, and the possibility of sanctions by the West on the country’s exports may underlie the metals’ recent run towards its 2014 high.
Palladium advanced 15 percent this year on concern that the strike in South Africa may add to a supply shortage. Prices have also gained as the U.S. and Europe threatened economic sanctions against Russia, the top producer, spurring speculation that exports will be disrupted.
“Workers have been prevented by force from returning to the mines,” Commerzbank AG said in a report. “This will doubtless make it impossible for production to be resumed and for the time being will continue to drive up platinum and palladium prices”. Last week, June palladium futures jumped more than 1.5% to $829.10 an ounce in New York, the highest level since March 2011.
About 80,000 workers are on strike in South Africa, which accounts for about 80% of the world’s platinum supply and roughly a third of the world’s palladium, because the two metals are often found and mined together. Members of the Association of Mineworkers and Construction Union, the biggest labor organization at Anglo American Platinum Ltd., Impala Platinum Holdings Ltd. and Lonmin Plc, have been on strike in South Africa since Jan. 23.
The bitter dispute has recently turned more violent with a number of reported deaths as striking union members prevent others from returning to work and reports of police in armoured vehicles patrolling residential areas surrounding some of the mines.
Mining companies had kept platinum and palladium ore in reserve ahead of the strikes, but analysts say those stockpiles are running low. That is pushing prices higher, said Peter Hug, head of trading at Kitco Metals.
Escalating tensions between Russia and the West following the annexation by the former of Ukraine‘s Crimea peninsula are also threatening the global supply. This is because tough sanctions against Russia by the western powers might curtail export of the metals from the country, resulting in lower global supplies.
Both platinum and palladium play important roles in pollution control, especially in the auto sector. And the auto industry’s demand for both metals is off the charts, with 2013 showing the industry’s demand for palladium exceeding available supplies by as much as a half million ounces. Further, increasing industrial applications, higher retail investments, and growing consumption of platinum and palladium for jewelry will likely give a nice boost to their demand.
Finally, holdings of physically-backed palladium exchange-traded funds hit record highs this week after heavy inflows into two products launched in South Africa in March pulled in half a million ounces of metal in less than two months. From here, analysts say holdings of palladium ETFs – popular investment vehicles which issue securities backed by physical metal – are likely to climb further as investors seek exposure to this year’s best performing precious metal.