In the bigger picture, both less shiny metals are trending in a wide trading trend. Although both metals are highly correlated, the intensity of the trending moves can differ. As a result, it is clear that palladium looks stronger on the chart than platinum, as evidenced by the following charts. Courtesy of Sharelynx.com.
Recently, strikes at South African mines have caused a massive drop in platinum and palladium production. In addition, the global palladium supply could collapse with 41% overnight if the West would impose export sanctions on Russia (source). What does this mean for the price?
Rick Rule, Chairman and Founder of Sprott Global Resource Investments, believes that platinum and palladium could go lower in the near-term, as fears of a sudden crunch dissipate. However, the real reason why platinum and palladium should rise longer term has nothing to do with geopolitics or (South African) labor issues. He explains:
The political dispute with Russia is not particularly relevant to the platinum and palladium industry, except in the extremely short term. Cutting off exports from Russia is not in the West’s interest, and certainly not in Russia’s interest. So I doubt that a politically-motivated ban on exporting the metals will arise.
The supply of platinum and palladium from Russia is threatened by decreasing ore grades at depth in the Norilsk mines, where most of the metals are mined. These mines have been in operation since the early 20th century, so they are likely nearly depleted.
New mines in Russia are probably 10 years away. So at least for the next decade, production should continue to decrease as deposits are increasingly mined out.
Rick Rule believes that labor disputes in South Africa mines will continue until some big miners will be forced to shut down. Platinum and palladium mines simply have to mine ever deeper to produce ore. These miners still generate insufficient cash flow to pay their workers well. Miners simply cannot earn a living wage. In Rule his view, the strikes are an illustration of the industry itself. “If platinum and palladium prices do not rise, mines will close down and workers will be unemployed. There is no way to maintain production rates without sustaining capital investments, but you can’t make those investments without being profitable. Thus, the price has to go up to maintain current production.”
The real reason why platinum and palladium prices will rise is not related to the supply side. As has been the case in other metals the past, a rise in demand will lead to a short squeeze. Rick Rule explains:
Remember that platinum and palladium deliver a high utility to users. They are primarily responsible for purifying the air from motor exhaust of most of the pollutants that threaten air quality.
So far, the price increase has been entirely due to supply constraints. Demand has been steady because of a lackluster recovery. If in addition to a supply squeeze, we experience a recovery of demand, the impact on the price of the metals could be dramatic. I believe it’s a matter of ‘when,’ not ‘if’ that happens.
In the short term, prices could come down slightly. The mining industry and industrial users of the metals probably saw the strikes in South Africa coming and stockpiled ample inventories for their near term uses, so the production loss today will not have an impact on supply for a while, which could temper investors’ fears.
Nonetheless, I believe that the loss of production, which so far over 550,000 ounces, will be felt in the intermediate term – say, several months from now. This is because producers will fail to make up for the lost production once work resumes at these mines, creating a shortage further down the road.
Follow Rick Rule via SprottGlobal.com.
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