Risks to Palladium Deficit Deepen should Russia-Ukraine Crisis Heightens
Frankfurt (Mar 11) The Russia-Ukraine tension has not only stimulated safe-haven demand for gold, Japanese yen and Swiss franc, it has also sent palladium prices higher amid concerns that sanctions against Russia, the largest producer of palladium, would further limit supply of the metal. Contributing roughly 40% of the world's palladium supply, Russia's palladium primary output was 2.6M oz last year. The country was also estimated to have released another 100K oz in stockpile sales. This was followed by South Africa which approximately supplied 2.35M oz of palladium last year. The 2 countries together supply 79% of the world's palladium (and 85% of platinum).The benchmark Comex of palladium has continued hovering at the highest levels in a year, after soaring more than +5% last week.
Palladium was in deficit over the past 2 years and the situation would likely continue this year. In an industry report by John Matthey released late last year, palladium's “primary supply will fall in the absence of Russian stock sales, but this will be offset by additional recycling. Higher auto demand will be balanced by lower jewelry's purchases and further substitution in industrial applications. This leaves investment as the wild card in the overall supply-demand picture: a proposed rand-denominated palladium ETF could generate additional demand from South African investors and push the market further into deficit”. Certainly, this forecast has not priced in the possibility of sanctions against Russia should the recent Russia-Ukraine crisis intensified and the deficit would only worsen if sanctions are really imposed.
The crisis would affect palladium more than gold prices. While Russia is a top 5 gold producer, it holds less than 10% of global mine supply and the country consumes (including central bank's buying) most of its production domestically. On the other hand, Russia produced 42% of global palladium supply in 2013, compared with over 50% in 2005. Last week's price surge was entirely driven by fears of the supply outlook as the second largest producer South Africa has been on strike from time to time. We expect palladium to continue to fluctuate at high levels ahead of the Crimean referendum due March 16.