Recent record-high palladium prices won’t necessarily mean increased supply since the bulk of the metal is mined alongside other metals, meaning limited reaction to its own price picture, says Metals Focus.
The consultancy said Tuesday that it looks for global palladium production to decline by 2% to 6.7 million ounces next year.
There is an old commodity market adage saying that nothing cures high prices like high prices (or conversely nothing cures low prices like low prices). This is because when commodity prices soar, producers – whether they are in soybeans or cattle – tend to increase output in an attempt to up their profits. This often means an eventual oversupply, especially as consumers cut back at the same time due to the higher cost.
But for the supply side, this scenario may not play out in palladium, Metals Focus explained. Analysts pointed out that palladium prices have nearly tripled since the start of the decade, yet supply is only up by roughly 10% since 2010.
“It is important to note that palladium is mined in polymetallic ore bodies, with the metal forming only a portion of total mine revenues,” Metals Focus explained. “As such, mining operations’ economics are limited in their exposure to the rise in palladium price.”
In fact, for the world’s largest palladium producer, Nornickel, palladium represents only 36% of total metal sales revenue, Metals Focus pointed out. The company this week reiterated an expectation for a flat production profile out to 2020.
Further, Metals Focus sees a limited supply response to the high prices for palladium production in South Africa. This country and Russia are the world’s two largest producers. However, South Africa is an even bigger player in the output of sister metal platinum, for which prices have been weak. As a result of weak platinum prices, some platinum group metals mines in South Africa are scheduled for closure.
“Platinum forms a larger share of these operations’ revenue and thus the fall in platinum price has mitigated the benefit of rising palladium revenues,” Metals Focus said.
Palladium historically was cheaper than platinum, but has been more expensive for more than a year now, recently recording a record premium.
Meanwhile, an additional 250,000 ounces of palladium output expected in North America in 2021 may be partially offset by losses from Vale, which produces palladium as a by-product of nickel mining, Metals Focus said.
“This highlights why it is necessary to view palladium production in the context of the PGM basket price,” Metals Focus said. “For most operations, the decline in the platinum price has mitigated the rise in palladium.”
H/T Kitco News