-->LISBON -- Russian stockpiles of palladium, the single biggest impediment to potential price improvements, could be as high as 13 million ounces according to HSBC commodity analyst Alan Williamson. The overhang of supply from Russia - a country hardly renowned for tactical or tactful metal trading - has been the main driver behind exclusively bearish sentiment on the metal.
The exact size of the stockpile accumulated by the country’s biggest miner, Norilsk Nickel, and by the Russian Central Bank and finance ministry, has been the single largest unknown in the palladium market yet remains the biggest determinant of price, which has been in freefall over the past two years.

“Russia’s precious metals production, consumption and inventory levels are state secrets and nowhere is Churchill’s description of a ‘riddle, wrapped in a mystery inside an enigma’ more apt than when discussing local precious metals markets,” said Williamson. Indeed, it was the opaque nature of the export quota system which wreaked havoc with the metal market in the late nineties. The resultant uncertainty of supply drove the price to dizzying heights of around $1100/oz and have also been responsible for it now being becalmed at in the $150-$250/oz level.

Williamson estimates Russian stocks of palladium to now be between 10 million and 12 million ounces, although he says the number could conceivably be as high as 13 million ounces. At current estimates, Norilsk produces between 2.8 million and 2.9 million ounces of palladium a year.

Until 1993, he says, inventories of the metal were built up while the palladium produced as a by-product of Norilsk Nickel’s main nickel mining activities was greater than annual demand. That changed in 1993 when the country’s hunger for foreign currency prompted a more aggressive export strategy; at its peak, exports exceeded production by more than three million ounces in 1998.

Yet, according to Williamson, despite the aggressive dumping of palladium at the end of the last decade, stockpiles are still likely to be upward of 11 million ounces.

The figure represents a considerable overhang in the palladium market struggling to deal with the looming threat of large scale scrap inflows into the market and a flood of new supply from South Africa’s UG2 expansions.

To compound matters, Norilsk Nickel accumulated about 2 million ounces by stopping exports briefly in late 2001 to bolster a flagging metal price. Of that figure, about 1moz to 1.5moz has been used to repay a loan to the country’s finance ministry and another 800,000 ounces - along with $100 million in cash - is to be used to acquire the US-based palladium producer Stillwater. The acquisition has the dual effect of not only injecting ounces onto the market at a time it can ill-afford it, but also propping up almost a million ounces of unprofitable annual production that might otherwise have been closed down. Not a pretty picture for the commodity market.

“(The) fundamentals of the palladium market look unreservedly grim, even allowing for a switch from platinum into palladium in the autocatalyst sector. We expect the market to move into structural oversupply, with ongoing downward pressure on prices as a result,” says Williamson.

Solution

There are, unfortunately, few quick-fixes for a market that has suffered such abuse and neglect at the hands of the Russians over the past decade. “We estimate that the Russians would need to stockpile somewhere between 1moz to 1.5moz of production annually over the coming years to keep the market in balance,” he says. The contrast to the tight supply scenario of the 1990s couldn’t be more marked. Williamson says HSBC’s base case scenario estimates the Russians might countenance stockpiling half of the required figure, thus “leaving the market in ongoing oversupply and prices under pressure”.

“Palladium looks set to resume its historic role of being a by-product and should be priced accordingly,” says Williamson.

Platinum

The picture for platinum is almost monotonously rosy. Supply remains in deficit despite frenzied efforts by South African majors to meet ever-increasing demand and Russian stockpiles of the metal, estimated at around 300,000 ounces, are hardly sufficient to present any threat to the metal’s price.