Global demand for palladium increased by 430,000 oz in 2003 to 5.26 million oz, primarily as a result of a sharp rise in purchases by US auto makers, who used far less metal from stocks than the year before. Purchases of metal by electronic component manufacturers also increased following depletion of inventories in 2002. In both industries, however, the underlying use of the metal fell due to thrifting.
Supplies of palladium surged by 1.2 million oz in 2003 to reach 6.45 million oz, closer to the level of global mine production than at any time over the past decade. As ever, Russian shipments of palladium were a major influence – Norilsk Nickel sold all of its production in 2003 after having held back a substantial proportion of its output the previous year.
The increase in supplies of palladium outweighed the improvement in demand, leading to a surplus of 1.19 million oz – this coming on top of substantial surpluses in the previous two years. Consequently, the palladium price was under pressure for much of 2003, despite the fact that buying of futures by funds accelerated during the second half of the year. Palladium ended the year at $193, 17.5 per cent below the opening fixing of $234 in January.
Purchases of palladium by the autocatalyst industry recovered by 13 per cent in 2003, rising to 3.46 million oz. This was not due to an increase in consumption of the metal in autocatalyst manufacture; on the contrary, use of the metal fell for the third year in succession as thrifting continued in all regions. However, because US car companies used far less palladium from inventories than they had in 2002, they purchased substantially more metal in the market in 2003.
Purchases of palladium for the manufacture of electronic components, the second largest market for the metal in 2003, also increased, jumping by 135,000 oz to 895,000 oz. Again, the rise was largely because manufacturers had run down excess inventories during 2002 (both of palladium pastes and finished components), and so bought substantially more metal in 2003. As in the auto industry, however, the underlying use of palladium decreased year-onyear. The average palladium content of conductive pastes was further reduced and the miniaturisation of components continued.
Demand for palladium in dental alloys dropped to 725,000 oz in 2003, a fall of 60,000 oz. Although the decline in the price of palladium stimulated modest improvements in demand in the European and North American markets, purchases of metal by the Japanese dental sector slumped as a result of a cut in the government subsidy for dental treatment. Demand for palladium in other applications weakened by 2.5 per cent to 590,000 oz as purchases of the metal for use in both jewellery alloys and chemical catalysts edged downwards.
Supplies of palladium surged to 6.45 million oz in 2003, an increase of 1.2 million oz from the previous year. Shipments of palladium from Russia jumped by more than 50 per cent to 2.95 million oz as sales of metal by Norilsk Nickel closely reflected mine output, the company having withheld a substantial volume of its production from the market in 2002. Supplies of palladium from South Africa and Zimbabwe also climbed, rising in line with expanding platinum output and outweighing a fall in North American production. The palladium price staged a brief rally from $234 to just over $270 during the first few weeks of 2003, as industrial demand picked up following a typical yearend lull in December 2002. However, from early February through to mid-April the price weakened, sliding to a six year low of $144.
Strong fund buying of palladium futures in August and September then produced a second rally, which reached $232, but large offers of physical metal and a lack of interest from industrial purchasers had driven the palladium price back under $200 by the end of the year. The price softened despite the fact that funds continued to open substantial long futures positions.
By the end of 2003, hedge funds and other investment funds had built up a total net long futures position equivalent to over 500,000 oz of palladium on NYMEX, and were estimated to have accumulated a similar sized net long position on TOCOM. On top of this, derivatives contracts equivalent to an estimated 1.5 million oz or more of palladium are believed to have been arranged through over-the-counter deals.
The speculative investment in palladium was part of a wider boom in the commodities markets as a whole but ran counter to the supply and demand fundamentals of the metal. Funds were partly attracted to palladium due the conviction that the widening premium between it and the price of platinum would become unsustainable, which would encourage auto companies to increasingly favour the use of palladium in gasoline autocatalysts. In addition, there was an awareness that US auto industry stocks were likely to be depleted during 2003. In short, having sunk to a low point of under $150, the palladium price was seen as having considerably more upside potential than downside risk.
Supply
Russian sales of palladium jumped by 53 per cent to 2.95 million oz in 2003. In contrast to the previous year, when it withheld a significant proportion of its production, Norilsk Nickel sold its entire output in 2003. The majority of the metal was shipped under contracts with end users, with the remainder being sold via the spot market. Some palladium, estimated to be less than 10 per cent of total Russian supplies, is also believed to have been sold from central government stocks last year.
Norilsk’s deal to acquire a majority shareholding in Stillwater Mining Co. was finalised in June. The 877,169 oz of palladium that were used as part payment for its Stillwater holding were exported from Russia to London before the end of March 2003 but as the metal was not sold to end users during 2003 it does not appear in our supply figures for the year.
A bill to amend the Russian state secrecy legislation covering data on pgm reserves, production and sales (excluding those made by the state) was passed by both houses of the Russian parliament in October last year and was signed by President Putin in November. The bill then came into effect in February 2004 but it now appears that further procedural hurdles must be overcome before data on pgm production can be published.
Supplies of palladium from South Africa grew by 7 per cent to 2.31 million oz in 2003 as pgm mining and processing expansions gathered pace. The rate of increase in refined palladium output was slightly higher than that of platinum as UG2 ore (which generally has a higher palladium content than the Merensky Reef) accounted for a greater percentage of the total volume of ore mined. Sales of palladium from the two pgm mines in Zimbabwe also climbed, in proportion to rising platinum output.
Palladium production in North America slipped by 50,000 oz to 940,000 oz in 2003. Output from Inco dropped sharply (in line with the fall in the company’s platinum production), and reduced mining rates at the Stillwater mine led to a decrease in Stillwater Mining’s refined palladium output. These negative factors, however, were largely offset by a jump in palladium output at North American Palladium following the successful commissioning of a new primary crusher.
Demand
Purchases of palladium by the autocatalyst industry last year recovered from the slump of 2002, rising by 13 per cent to 3.46 million oz, an increase of 410,000 oz. The improvement in purchases of palladium was due almost entirely to a marked upturn in buying by the US auto industry. In 2002, US auto companies consumed well over 1 million oz of palladium from inventories, and a significant volume of metal was also sold back to the market. Although some US auto makers continued to run down their remaining stocks of palladium in 2003, they sourced a much greater proportion of their metal requirements from the market, with buying increasing during the second half of the year. Consequently, North American purchases of palladium for autocatalysts almost doubled from 640,000 oz in 2002 to 1.21 million oz in 2003.
In sharp contrast to the rise in the volume of metal purchased, the amount of palladium consumed in the manufacture of autocatalysts dropped for the third year in succession as a number of leading car companies continued to thrift catalyst loadings. This was particularly true in North America, where use of the metal fell by more than 20 per cent. In Europe, an 11 per cent drop in gasoline car production in 2003 had a knock-on effect on palladium demand; purchases of the metal in the region fell by 160,000 oz to 1.21 million oz.
Japanese purchases of palladium increased by 4 per cent to 540,000 oz in 2003 but the improvement was due to the fact that use of stocks had depressed purchases in 2002, albeit on a much smaller scale than in the USA.
With palladium trading at a substantial and widening discount to platinum in 2003, some car companies took steps to reduce their platinum consumption by electing to switch to palladium-based catalysts on new gasoline vehicle models. These decisions, however, came too late to have any significant impact on palladium demand in 2003.
Consumption of palladium in the electronics industry in 2003 continued to be adversely affected by thrifting, as well as by the ongoing miniaturisation of components. Despite a sharp upturn in sales of multi-layer ceramic capacitors (MLCC – the largest electronics application for palladium) and an increase in palladium-based MLCC manufacturing capacity in Asia, use of the metal dropped by 7 per cent overall. Nevertheless, purchases of palladium jumped by 18 per cent year-on-year to 895,000 oz. As in the auto industry, electronic component manufacturers ran down excess inventories in 2002 (in this case, of palladium pastes and finished components), depressing purchases of palladium. With stocks having returned to normal levels by 2003, demand for the metal rebounded.
Demand for palladium for use in dental alloys dropped by 60,000 oz to 725,000 oz in 2003, a fall of 8 per cent. The reduction in overall demand was a result of a slump in Japan, by far the largest market for palladium-based dental alloys. A proportion of the cost of the 20 per cent palladium alloy used in dentistry in Japan is reimbursed under a state-run programme.
However, in April 2003, the percentage of the cost payable by patients was increased from 20 to 30 per cent (having risen from 10 to 20 per cent just four years earlier). This had an immediate negative impact on the number of visits for dental treatment made by the Japanese public. Palladium demand in Japan for the year as a whole consequently fell by 20 per cent to 405,000 oz, the lowest level for more than a decade. The slide in the Japanese market greatly outweighed modest improvements in demand in North America and Europe, where the fall in the price of palladium and rise in the price of gold made dental alloys based on the former more competitive.
Purchases of palladium for industrial and other markets edged down by 15,000 oz to 590,000 oz in 2003. A fall in the use of palladium-based catalysts by the bulk chemicals industry outweighed a slight increase in demand for palladium catchment gauze by nitric acid producers. Purchases of palladium for use in jewellery alloys slipped in 2003 due to the contraction of the Japanese platinum jewellery market, where the most common platinum alloys contain between 5 and 15 per cent palladium. In addition, Chinese jewellery manufacturers used less palladium in white gold alloys, preferring less expensive metals such as nickel, silver, tin and zinc.
Outlook
The first three and a half months of 2004 were marked by further heavy buying of palladium futures by funds via the New York and Tokyo futures exchanges and through over-the-counter deals. With offers of physical metal easing from the high levels seen at the end of 2003, the speculative buying finally had a conspicuous impact on the price of palladium, which climbed from $194 at the beginning of January 2004 to hit a peak of $333 on the 13th of April.
Trading sentiment towards the metal was boosted by an announcement by a European autocatalyst company in early April that it had developed a diesel car catalyst containing a proportion of palladium in place of platinum. (Because of the particular operating environment of diesel exhausts, diesel oxidation catalysts have to date contained only platinum).
However, between the 20th and 22nd of April, the palladium price plunged, hit by the long liquidation of fund futures positions that was seen across both the base and precious metals markets. The price dropped from a morning fixing of $321 on the 20th to an afternoon fixing of $257 on the 22nd of April, a fall of 20 per cent in three days. The price of palladium subsequently recovered somewhat on the 23rd, moving up to trade between $270 and $280. Despite the burst of long liquidation, hedge funds and other investors still held very substantial long positions in palladium towards the end of April 2004. The perception remained that, although the spread between platinum and palladium had narrowed (closing from $613 on the morning of the 20th to $549 on the afternoon of the 26th), it was still unsustainably large and that the possible upside in palladium was greater than the downside in platinum.
We forecast a further increase in auto industry purchases of palladium for use on gasoline vehicle autocatalysts in 2004, as stocks within the US auto industry were largely depleted during 2003. In addition, switching to greater use of palladium-based autocatalysts for gasoline vehicles will begin to have a greater impact. Nevertheless, thrifting will continue to affect consumption of the metal in autocatalysts in most major markets in 2004.
Demand for palladium in dental alloys should also improve this year as the number of dental treatments performed in the Japanese market starts slowly to recover. In addition, North American demand for palladium-based dental alloys is likely to rise moderately for the third year in succession if the price of palladium remains significantly below that of gold. Purchases of palladium for use in electronic applications are projected to weaken slightly in 2004, despite further growth forecast for component sales. Thrifting, miniaturisation and the rising recovery of palladium from electronic scrap (particularly in Europe where new legislation will come into effect in 2005) are expected to depress purchases of the metal.
The contraction of profit margins on platinum jewellery in China to very low levels during the final quarter of 2003 and first quarter of 2004 led a number of manufacturers to start producing palladium jewellery. With much less competition than in the platinum jewellery sector, participants were able to price in much higher profit margins.
We estimate that in excess of 250,000 oz of palladium were purchased by Chinese jewellery manufacturers during the first three months of 2004 as stocks of palladium jewellery were built up. However, by late April manufacturers and retailers were reported to be disappointed with the initial level of sales, with suggestions that palladium jewellery has not been well received by the public.
In summary, we believe that palladium demand has the potential to rise faster in 2004 than it did in 2003, driven by a higher level of purchasing by the US auto industry as the impact of stock use finally dissipates. Demand for palladium-based dental alloys should also improve, and an upturn in the use of palladium catalysts by the chemicals industry is likely.
At the same time, supplies of palladium are expected to rise substantially in 2004: South African mine and plant expansions will deliver significantly more metal this year; in the region of 400,000 oz of palladium is expected to be supplied under contract to the autocatalyst market from the stocks held by Stillwater Mining; and recovery of palladium from autocatalysts is projected to climb rapidly as heavily palladium-loaded catalysts that were fitted to vehicles in the mid-1990s are recycled in increasing volumes.
The physical palladium market, therefore, will remain in substantial surplus in 2004. As was demonstrated during the first four months of the year, however, the price of palladium has become largely divorced from the fundamentals of supply and demand. The weight of speculative investment has been responsible for supporting the price, and additional substantial buying by funds would have the capacity to drive it back to recent highs. On the other hand, any further concerted long liquidation of the still very large speculative positions could lead to a sharp correction downwards. On balance, we believe that palladium is likely to trade between $200 and $340 over the next six months.
*From Johnson & Matthey 2004 Platinum Metals Review |
