Palladium prices last traded this high in March 2001. The recent price spike has been driven by investors’ concerns that a mining strike in the world's second largest producer, South Africa, could chock off supplies at the same time as an over-exuberant auto manufacturing world drives demand for the car-exhaust metal. Palladium’s industrial uses, and the dependence on South Africa for supplies, have helped keep the metal aloft even as other precious metals stumbled this year. Miners in South Africa went on strike in January for the second time in two years, demanding higher wages and better working conditions. As WSJ reports, the walkout has sharply reduced palladium exports from South Africa, leaving global palladium inventories diminished with only sufficient supply to meet 16 weeks of demand.
“There is no reason to sell palladium right now,” according to Frank Lesh, a broker at Future Path Trading. “This thing can go to $1,000.” But not everyone’s so bullish.
The strike began at the start of 2014 – when the price spike began…
From the WSJ article:
Miners in South Africa went on strike in January for the second time in two years, demanding higher wages and better working conditions. The walkout has sharply reduced palladium exports from South Africa, which produces 40% of the world’s supplies.
Global palladium inventories have dwindled and are now sufficient to meet only 16 weeks of demand, according to CPM Group, a consulting firm. Palladium is usually mined together with platinum, a more expensive metal.
The lower supplies go, the higher prices will rise, investors say. “If there’s not much supply, it all just gets sucked up” by manufacturers and other palladium consumers, said Frank Holmes, CEO of U.S. Global Investors, which manages about $1 billion.
The miners’ strike, which involves some 70,000 workers, is the longest ever in South Africa. After Monday’s talks ended without an agreement, newly appointed South African Mining Minister Ngoako Ramatlhodi said he would exit from the talks.
Meanwhile, palladium users have few other places to turn for supply. Russia exports more palladium than South Africa, but relies on Cold War-era stockpiles to supplement production. Many analysts think those extra supplies are running low. No other country is a significant palladium producer.
But there are technical issues too…
Some investors and analysts see ETFs playing a role in driving up palladium prices. The amount of metal these funds hold has risen this year after two new funds were launched. Total holdings of palladium by ETFs stood just shy of 2.8 million ounces at the end of May, exceeding the annual production of Russia.
Not everyone is so exuberant…
To be sure, prices would likely drop if the walkout ends. Prices fell nearly 5% in the month after the last major mining strike was resolved in September 2012, though they later recovered. Demand from the auto industry, though improving, may not be strong enough to keep prices high without supply concerns also lending support, analysts say.
“Investors will have every excuse to sell above $850 per ounce,” said Rohit Savant, an analyst with CPM Group. “Breaking much further above that won’t be easy.”
While, for now, it appears fundamental supply and demand characteristics are still in place, we suspect this is yet another ETF/synthetic tail wagging the physical commodity dog…