Palladium Seen Rising 15% in 2011 as Russian Cargoes Drop: Freight Markets

Russia, the world’s biggest palladium producer, is shipping the smallest amount of metal to Switzerland in 15 years, a sign of declining state stockpiles that may drive prices as much as 15 percent higher by December.

Cargoes to Switzerland, one of Europe’s two main hubs for storing and trading precious metals, fell 12 percent to about 500,000 ounces last year and compare with the two-decade average of 1.3 million ounces, Swiss customs data show. Fewer shipments of the metal used in almost every catalytic converter may mean shortages. The five analysts ranked by Bloomberg as the most accurate over the past two years forecast prices as high as $940 an ounce in 2011, based on the median of their estimates.

While Russian stockpiles are a state secret, Johnson Matthey Plc, the London-based trader, says they were the fourth- largest source of supply in 2010. OAO GMK Norilsk Nickel, the biggest producer, said in December it expects “insignificant” amounts from reserves and Standard Bank Group Ltd. forecasts stocks will be depleted as early as this year.

“The palladium market, excluding any Russian stockpiles coming in, is going into an ever-increasing deficit,” said David Davis, a mining investment analyst at Standard Bank’s SBG Securities (Pty) Ltd. in Sandton, near Johannesburg. “It’ll put upward pressure on the price.”

Photographer: Chip Chipman/Bloomberg

A bag of palladium and platinum ore samples are displayed before being tested in the Analytical Lab at Stillwater Mining's processing plant in Columbus, Montana. Close

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Photographer: Chip Chipman/Bloomberg

A bag of palladium and platinum ore samples are displayed before being tested in the Analytical Lab at Stillwater Mining's processing plant in Columbus, Montana.

The metal traded at $817.25 at about 7 p.m. yesterday in London. Prices hit a record $1,125 in 2001 when shipments were disrupted.

Mine Production

Mine output will fall 5.4 percent to 6.8 million ounces and demand from carmakers will climb 6.7 percent to about 5.5 million ounces in 2011, Barclays Capital estimates. Demand rose 15 percent last year to the highest in a decade while supply, excluding recycling, was steady, and without Russian reserve sales there would have been a shortage, Johnson Matthey said.

Palladium accounts for 90 percent to 95 percent of precious metals used in gasoline catalytic converters and about 25 percent in diesel devices, according to Johnson Matthey, which has supplied one in three of the world’s autocatalysts.

Catalytic converters each use about 4 grams (0.13 troy ounces) of precious metals, according to Mark Bedford, the director of precious-metals marketing at Johnson Matthey. Four grams of palladium cost about $105 and $237 for platinum.

Palladium jumped more than fourfold since the end of 2008, reaching a 10-year high of $862.25 on Feb. 21. Platinum doubled in that period. The Standard & Poor’s GSCI Total Return Index of 24 commodities rose 34 percent, the MSCI World Index of equities climbed 46 percent and Treasuries returned 1.9 percent, a Bank of America Merrill Lynch index shows.

Energy Prices

Prices have declined on concern that protests across North Africa and the Middle East will drive energy prices higher and weaken economic growth.

Russia mined 2.7 million ounces of palladium in 2010, worth $1.4 billion at last year’s average price, Johnson Matthey data show. South Africa produced 2.49 million ounces, for $1.3 billion, and mine output totaled about $3.2 billion. Recyclers recovered 1.32 million ounces from spent autocatalysts.

Sales of Russian stockpiles dropped to 1.01 million ounces in 2010 from as much as 1.49 million in 2007, the data show. Inventories were built up from excess output in the 1970s and 1980s and may have declined to less than 1 million ounces last year, SBG’s Davis said.

Customs Data

“We don’t know how many years it took to build them up and how they big they were, but at some time they must empty out,” said Thorsten Proettel, an analyst at Landesbank Baden- Wurttemberg in Stuttgart, Germany, and one of the members in the Bloomberg survey. “At that time it might be a problem for the market.”

Swiss customs data includes ingots, powder and half- processed material, mostly brought in by air freight. Bars are stacked on pallets, according to Afshin Nabavi, a senior vice president in Geneva at bullion refiner MKS Finance SA, which trades the metal. It is transported in plastic pots when in powder form, said Johnson Matthey’s Bedford.

Any rise in car sales and palladium may be curbed by energy prices after oil in New York jumped 27 percent from a year ago. Protests across North Africa and the Middle East have disrupted supply, sending gasoline prices to a record in the U.K., according to the Automobile Association, the nation’s largest motoring organization.

“Everybody’s suddenly nervous about high oil prices reducing the amount of distance that people are driving and pushing back the likelihood of people buying cars, and therefore it could impact on palladium consumption in the short term,” said David Wilson, an analyst at Societe Generale SA in London and another participant in the Bloomberg survey.

Auto Sales

Investor demand may overcome a drop related to auto sales. Palladium held in exchange-traded products reached a record 73.08 metric tons on Feb. 28, about 26 percent of annual gross demand, according to data compiled by Bloomberg.

Norilsk Nickel, based in Moscow, will report earnings per share rose 22 percent to $33.09 this year, based on the mean of seven analysts’ estimates compiled by Bloomberg.

Palladium slumped 87 percent over two years after reaching a record in 2001 as manufacturers switched to using more platinum. Ford Motor Co., the second-largest U.S. carmaker, wrote down the value of its precious metals by $1 billion that year, contributing to the Dearborn, Michigan-based company’s first annual loss since 1992.

An ounce of platinum bought 2.16 ounces of palladium on Feb. 18. The ratio was last that low in 2002, after which platinum climbed 29 percent and palladium fell 31 percent in the following year. While sustained prices above $1,000 may spur autocatalyst makers to use more platinum, the process “won’t happen overnight,” SBG’s Davis said.

Vehicle Sales

Asia is leading the increase in auto demand, with personal vehicle sales likely to increase 7.3 percent to 24 million this year, according to Oxford, England-based J.D. Power Automotive Forecasting.

China’s economy will grow 9.5 percent this year, according to the median in a Bloomberg survey of eight economists. While that’s down from 10.3 percent in 2010, it’s almost three times predicted growth in the U.S. and almost sixfold the forecast for the euro region.

The U.S. in 1975 introduced legislation leading to vehicles being fitted with catalysts to cut pollution, and about 95 percent of all new vehicles sold globally are fitted with the devices, according to Johnson Matthey. Ceramic or metal is formed into a honeycomb and coated with chemicals and metals, and is installed in the exhaust line in vehicles.

Even after last week’s drop, “palladium is likely to be the star performer of precious metals again in 2011,” said Anne-Laure Tremblay, a London-based analyst at BNP Paribas SA and another participant in the Bloomberg survey.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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