South Africa’s most costly mine strike ever compounded the longest global production shortfall in 14 years for palladium, just as automakers are set to use record amounts of the precious metal.
Output of the commodity used mostly to cut auto emissions will trail demand by an all-time high of 1.6 million ounces in 2014, after the strike idled 60 percent of supplies from the world’s second-largest producer, according to auto-catalyst maker Johnson Matthey Plc. Prices that gained 17 percent since January and touched a 13-year high yesterday may jump another 16 percent by year-end to $950 an ounce in New York, a Bloomberg survey of 15 analysts showed.
Even after miners agreed today on a wage deal in a bid to end the walkout that began in January, Morgan Stanley says output deficits will last through at least 2018 as surging car sales from North America to China boost demand for catalytic converters. Barclays Plc predicts automakers will use a record 7.19 million ounces in 2014. Investors have boosted holdings in exchange-traded funds by 40 percent since March.
“The car manufacturers are demanding more, while the supply situation is worsening by the day,” Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors LLC, which manages $1.3 trillion, said May 23. “Even after workers return, output from Africa will be lower as mines have been damaged. Palladium will be one of the strong performers this year.”
Futures have rallied 14 percent this year to settle at $819.40 on the New York Mercantile Exchange, out-gaining all other metals except nickel. Prices yesterday touched $864.60, the highest since February 2001. The Standard & Poor’s GSCI gauge of 24 commodities rose 3.7 percent since the end of December, while the MSCI All-Country World Index of equities is up 4.1 percent. The Bloomberg U.S. Treasury Bond Index added 2.7 percent.
The world’s three largest platinum companies and the biggest union at their South African mines agreed on a wage deal that the labor organization will take to its members in a bid to end a 20-week strike
Tougher environmental laws mean 90 percent of new vehicles have catalytic converters that are made mostly with palladium in gasoline-fueled engines, while a related metal, platinum, is used for diesel. Auto catalysts will accounted for 72 percent of world palladium use last year, Johnson Matthey estimated.
Global sales of cars and light commercial vehicles will rise 5 percent this year to a record 88.4 million and expand 5.4 percent further in 2015, according to forecasts from LMC Automotive Ltd. Passenger-vehicle sales in China, the largest auto market, rose 14 percent last month, the most since February, China Association of Automobile Manufacturers said.
Rising use of palladium by carmakers means mine output and supplies of recycled metal will be less than demand for a third straight year, the longest supply deficit since 2000, forcing buyers to dig deeper into inventories, Johnson Matthey estimates. The 2014 shortfall will be more than twice as big as last year, data show.
Autos will use 7.223 million ounces this year, up 87 percent from 2005, while 1.967 million ounces will go to chemical, dental, electronics and jewelry industries, Morgan Stanley said. Demand for palladium in vehicles has surged over the past decade while platinum use has dropped.
To ensure supplies, London-based Johnson Matthey, which makes one of every three catalysts in the world, agreed last month with Stillwater Mining Co. to buy all the palladium the U.S. company mines for the next five years. Billings, Montana-based Stillwater will get market prices and premiums for the metal and “very good rates” on refining services, Chief Executive Officer Michael McMullen said by e-mail. Prices may reach a record $1,150 over the next two years, topping the previous high of $1,125 in 2001, he said.
An end to the four-month strike may keep prices in check. Futures tumbled 4.7 percent when the union announced its deal today. Supplies are also continuing to reach the market from Russia, the world’s largest producer, which accounted for about 40 percent of output last year.
The country’s exports to Switzerland climbed to an 11-month high in April, a month after the annexation of Crimea fueled speculation of new trade sanctions that would disrupt Russian shipments. That helped accelerate price gains as output dropped in South Africa, which accounted for 37 percent of world palladium production last year.
“There have been no sanctions against Russia that affected supplies, so the Russia premium is very temporary,” Dan Denbow, portfolio manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio, said May 30. “Also, prices may take a beating once the strike ends.”
While Russia remains the top supplier, its secret reserves are no longer as big as a decade ago, when the country supplied two-thirds of the world’s palladium, said Anton Berlin, the marketing director at OAO GMK Norilsk Nickel, the largest palladium producer. Palladium stockpiles at Gokhran, the state-owned depository for precious metals, probably are exhausted and no longer affecting the market, Berlin said in September.
Investors remain bullish as talks failed this week to end the South Africa dispute. Holdings in exchange-traded funds reached a record 91.93 metric tons yesterday, compared with 65.72 tons on March 31, data compiled by Bloomberg show. Hedge funds held a net-long position in 21,649 futures and options contracts on the Nymex as of June 3, up from 15,660 at the end of last year, government data show.
More than 70,000 workers have walked off the job at mines owned by Anglo American Platinum Ltd., Impala Platinum Holdings Ltd. and Lonmin Plc since Jan. 23. Labor unions want wages for the lowest-paid underground employees to be more than doubled to 12,500 rand ($1,164) a month by 2017.
The mining companies say they’ve already lost 22 billion rand in revenue. Ngoako Ramatlhodi, the South African minister who led the latest round of failed talks, said jobs cuts have become more likely.
“A lengthy strike like this will affect production even after workers come back, so output will continue to drop, and at the same time, demand is very buoyant,” Patricia Mohr, a commodity market specialist at Scotiabank Group in Toronto, said May 27. “I am betting prices will go much higher.”