Palladium price outlook as Russia looks to limit production

Jonathan Barratt is the CEO of CelsiusPro Australia, a boutique climate risk InsurTech company.

In an interview with CNBC, Mr. Barratt raised the interesting proposition that Russia, being a major producer of Palladium may choose to limit supply, raising global prices and its export revenues in a bid to counter recent G7 actions.

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He believes that the Kremlin may be prompted to take such measures in retaliation to the G7 tightening the economic noose, particularly vis-à-vis gold and oil exports while initiating a discussion on broader price caps.

According to Barratt, in terms of gold exports, with the combined effect of sanctions and the London Bullion Market Association’s decision to delist major Russian gold refineries as early as March 2022, Russia may lose “$15 billion in exports”, approximately 85-90% of its 2021 revenues.

With the disruption in gold exports already priced into the market, prices have not shifted dramatically this week, with the move being seen mostly as symbolic.

However, Barratt believes that if Russia wants to respond, “tit-for-tat”, the palladium market would be a strategic target, and “that’s probably where she will do it”. “Russia has some levers to play if it wants to”, he added, and will likely shift to pricing exports in rubles on the open market, boosting sales in other countries.

Although Barratt stated that India could be an important destination for Russian gold sales in the future, China too has expanded its appetite by loosening restrictions on imports in 2021.

What’s happening with palladium?

Palladium (Pd) is a white metal that is rarer than gold and silver, and has considerable applications in catalytic converters, jewelry, dentistry, and electronics. The biggest demand for Pd is for catalytic converters in exhaust systems, which convert poisonous, toxic gases to harmless emissions.

Major producers such as Russia and South Africa benefitted from the surge in prices since the invasion of Ukraine, with prices rising to $3,442 per ounce in early March, an all-time intraday high for the metal.

The Russian company, Norilsk Nickel is the world’s largest palladium producer and has slated US$35 billion for upgrading infrastructure by 2030.

Palladium prices were especially volatile after two major refiners were delisted by the London Platinum and Palladium Market (LPPM) in April, blocking transactions in London and New York.

However, prices have eased since then following weak demand outlooks, although they remain historically elevated in the $1800 – $2000 range.

The G7 this week

Great Britain, Japan, Canada, and the United States jointly banned Russian imports of gold, in response to the ongoing aggression in Ukraine. President Biden stated that this would hurt Russian revenues by stalling “a major export that rakes in tens of billions of dollars” annually.

Instead, other developments may force a reaction from Russia, including further restrictions on oil and even gas exports.

The G7 invited “all like-minded countries to consider joining us in our actions,” by banning the transport of any Russian oil that has been sold above a fixed price.

The group believes that such a move would stifle monetary flows to Russia, making it much too expensive for Putin to carry on the war in Ukraine.
Ironically, this action comes due to the misfiring of western oil sanctions, which saw Russian revenues rise despite lower volumes.

In terms of oil, China and India are both benefitting from discounted prices. Saudi Arabia is no longer China’s biggest supplier with Russian oil sales surging 55% from a year earlier.

To operationalize a price ceiling on oil, the G7 is looking to make financing, insurance, and shipping contingent on a G7 prescribed cap.

Russia strikes back?

Barratt expects that Russia can retaliate by limiting Pd exports to the west and pricing the commodity in rubles to blunt dollar restrictions.
It certainly seems that Russia still maintains commercial goodwill among many markets.

According to a Reuters report, “China, India, and Pakistan are among 35 countries that have refused to condemn Russia”, which indicates that enforcing such a ban on any widely demanded product, whether crude, gas, gold, or Pd would be challenging.

Moreover, the Kremlin stated that major producing companies in Russia are likely to alter contract terms to counter any further international restrictions.

Russian Pd Exports

As per the Observatory of Economic Complexity (OEC), Russia accounts for approximately 25% – 26% of global Pd exports. Although its share has remained largely flat since 2016, this is in sharp contrast to South Africa, the other major producer, that has seen a consistent decline over the past 4 years.

As per the OEC, the largest importers of palladium in 2020 were the United Kingdom ($4.3 billion), the US ($3.8 billion), Germany ($3.5 billion), Japan ($2.5 billion), and China ($2.3 billion).

With several of these countries pushing a green agenda and the importance of the white metal in emissions control, this step by the G7 will likely be a setback to climate goals amid rising investor and public activism.

However, with aggregate demand expected to decline sharply in economically advanced countries, automotive applications for Pd would likely reduce in these countries in any case.

This may cap the long-run rise in Russian export prices if Pd supply is restricted.

Russia would instead be looking to capitalize on demand from China and Hong Kong, which together account for nearly 18% of global exports, North Macedonia which has seen an explosion in demand during the last few years, Brazil, and to a lesser extent India.

China and Hong Kong both levy a 0% tariff on Pd imports, which may support additional buying from Russia.

Although importing countries may fear secondary sanctions in switching to a ruble payment, thus far, the strategy seems to be working with oil revenues surging and the USDRUB rising to a seven-year high.

Substitution demand

A factor that may reduce demand for Russian Pd, has been the rising substitution demand for its sister metal Platinum (Pt).
Trevor Raymond, research director at the World Platinum Investment Council (WPIC), said, “We’ve argued for three years now that the price gap between the two metals means that substitution makes huge economic sense.”

Today, the spot price of platinum is trading at $932 per ounce, while palladium is trading at $1,932 per ounce. Forecasts suggests that higher Pd prices will only aggravate this differential.

An additional factor could be the UK’s decision to tax Russian platinum and palladium to the tune of 35%, which may hurt Russian palladium by making it economically unviable.

However, this may still play to Russia’s strengths as it is the second-largest exporter of platinum after South Africa, commanding 16.6% of the global market share.

Ahead of the midterms

With inflation raging in advanced countries, and not showing any concrete signs of pulling back, G7 nations are playing a dangerous game that could see domestic prices accelerate.

For Biden in particular, this is a very delicate balance in the run-up to the mid-terms. The President is likely trying to cultivate an image of being tough on Russia and yet fending off rising prices. With gasoline already at historic highs, tougher measures on Russia may end up damaging his re-election prospects in 2024.

Although the G7 is attempting to isolate emerging economies from Russia, several commentators may equally see Western sanctions as an important contributor to global inflation, especially with rising food and energy insecurity.

Attempting to enforce tougher restrictions via the G7 and other global bodies may not sufficiently dissuade demand for more competitive priced goods by emerging economies.

Price outlook and the opportunity for South Africa

With tighter supply chains, rising costs and in light of additional sanctions, Metal Focus forecasts that palladium prices could reach near $2300 levels by 2023. The upside could be limited by a transition to higher platinum use, but this too maybe challenging with ongoing disruptions, and the benefits that would accrue to Russia if Pt prices rise.

A second threat would be from looming fears of recession, which may drive down demand. However, sales should be supported by demand in the health sector, especially for use in dental filings and pacemakers.

With South Africa’s declining mining efficiencies, this could provide a golden opportunity to exploit the vacuum left by Russia, amid higher demand for zero-carbon emitting power facilities. However, this is easier said than done, with transportation languishing in the country.

Despite the country’s vast market share in global mined exports, creaking infrastructure has pushed South Africa into the bottom 10 of the Frasier Institute’s Annual Survey of Mining Companies, released in April 2022.

A meta-twist?

In an interview in early June, Bob McNally, President of Rapidan Energy Group and previously, the managing director at Tudor Investment Corporation and a former White House insider, stated that he believes that “there has been quiet support even from the West for (increased buying of Russian crude oil by countries in Asia) …. they want those barrels to flow to global oil markets (at a discount) so the overall price won’t go up for everybody.”

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