Palladium price within striking distance of record high

Frik Els | June 10, 2014 | 5:38 pm Base Metals Precious Metals Africa Europe Gold Palladium Platinum

Workers gather to listen to union boss Joseph Mathunjwa near site of Marikana mine massacre

PGM futures trading in New York initially showed little reaction to news that the latest round of strike negotiations in South Africa ended in failure.

But strong gains on Tuesday saw palladium trading near three-year highs and platinum surging past pre-strike levels.

July platinum added more than $30 an ounce to a session high of $1,485.80 an ounce, bringing year to date gains to nearly 8%.

June palladium jumped to $855 an ounce, not far off a three-year high and up 18.5% this year.

Futures trading on New York’s Nymex hit an all-time record price of $865 in February 2011, but the London fix for the precious metal peaked a decade earlier. On January 26, 2001 palladium was fixed at $1,090 an ounce, but then retreated sharply to $319 by October that year.

More than 70,000 workers at the world’s three largest platinum and palladium producers, Anglo American Platinum (LON:AAL), Impala Platinumm (OTCMKTS:IMPUY) and Lonmin (LON:LMI), have been on strike since January 23.

Yesterday the South African government’s so-called Inter-Governmental Technical Task Team mediating talks and overseen by newly-installed Minister of Mineral Resources Ngoako Ramatlhodi was dissolved without any outcome.

Leader of the Amcu union Joseph Mathunjwa said the latest talks broke down after the union refused to compromise on its demand for the immediate implementation of R12,500 ($1,175) a month basic wage. Producers have been offering phased salary increases of 9%.

The three mines together contribute 40% of global supply have lost combined revenue of R21.8 billion ($2 billion) while striking workers have forfeited roughly $900 million in wages.

The nearly five-month long strike has seen mining output in the African nation plummet leading to a contraction in the overall economy during the first quarter. Roughly 10,000 ounces of platinum production and 5,000 ounces of palladium are lost each day the strike drags on. Even when strikers do return to work it would take up to three months to restart production.

South Africa and Russia combined account for close to 80% of global supply of palladium and 70% of platinum output which are mainly used to clean emissions in automobiles. The biggest consumer of PGMs, Europe’s auto industry is forecast to show growth for the first time in six years in 2014.

Platinum’s relatively subdued reaction to the strikes so far has been blamed on high above ground stocks and greater recycling.

Despite the fact that South Africa plays a secondary role to Russia in palladium production, the precious metal’s fundamentals are better.

Industry consultants Johnson Matthey Plc said last month platinum consumption will beat supply by 1.22 million ounces while the palladium shortfall will widen to 1.61 million ounces, from 371,000 ounces last year and the eighth year in a row of deficits.

That would constitute the largest market deficits ever, based on Johnson Matthey data going back to 1975 for platinum and 1980 for palladium. Given the ongoing deadlock these numbers would probably be revised upwards soon.

Another major factor boosting the the palladium price has been the launch of two new physical palladium-backed exchange traded funds in Johannesburg in late March and the sharp increase in holding to some 3m ounces.

It also explains partly why palladium has fared so much better than platinum argues Standard Bank in a research note:

Over the past week, ETFs added 79Kozs of palladium to their holdings, while platinum ETF holdings increased by only 9.9Kozs. This should keep the metal well supported on any pullbacks.