OAO GMK Norilsk Nickel sees South African output of platinum-group metals declining in the next several years as the Russian mining company leads investors in creating a $2 billion palladium fund.
“Investments in a vast amount of projects in South Africa were delayed and it’s hard to expect an increase in output in the region,” Anton Berlin, head of strategic marketing at Norilsk, said in an interview on Monday. “Most likely, it will even fall.”
This year, South African output will recover to match its 2013 level of 4.4 million ounces of platinum and 2.4 million ounces of palladium following a sharp decline caused by five months of strikes in 2014, he said.
Production of platinum and palladium, which are mined from the same deposits and used in automobile catalytic converters, has been lower than demand since at least 2012. Opaque stockpiles held by hedge funds have contributed to price volatility, according to Norilsk.
More than 1 million ounces of potential output were lost during strikes in South Africa that ended in June, according to research by Johnson Matthey Plc.
The platinum market had a deficit of almost 1 million ounces last year, which should narrow to 500,000 ounces this year, according to Norilsk’s estimates.
South Africa’s ore quality has declined over the past decade, and miners are having to seek reserves deeper underground, raising development costs, according to Berlin. Low metals prices make investments less attractive at the moment, he said.
Platinum declined more than 18 percent in the past 12 months and traded at $1,167.25 per ounce at 11:41 a.m. in London. Palladium was little changed at $770.35 per ounce.
Price volatility has been intensified by undisclosed stockpiles of platinum-group metals, with hedge funds posing the biggest danger, Berlin said. It’s only known that ETFs hold up to 2.8 million ounces of platinum and 2.9 million ounces of palladium but nobody really knows how much metals are with hedge funds or pledged under so-called metals accounts, he said.
Norilsk seeks to bring some of those inventories into a more transparent structure by forming a $2 billion palladium fund that would buy the metal from the Russian central bank and some hedge funds, according to Berlin.
The investors are seeking to reach an agreement with hedge funds on purchases in the third or fourth quarter, according to Berlin.
The Bank of Russia has agreed to sell palladium from its stockpiles, billionaire Norilsk co-owner and Chief Executive Officer Vladimir Potanin said last month.
Norilsk is ready to invest $200 million in the fund with an equal amount coming from Interros, Potanin’s investment company. Another Norilsk investor, Roman Abramovich, may also participate, according to Potanin.
The group agreed with an international bank on a loan for 80 percent of the potential fund, or $1.6 billion, he said, declining to name the bank. The metal will be used as collateral.
Last year, Potanin said that Bank of America Corp. was interested in the deal. The bank’s external service in Moscow declined to comment on Tuesday.
The fund will sell palladium only to industrial clients, Berlin said. “Demand is high and even all of Norilsk’s output can’t satisfy it.”