Precious Metals: Some Recent Developments 15 comments
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I am convinced that the bullish fundamentals of palladium are even better in 2009. Recently, Impala Platinum (IMPUY.PK) updated its estimate of platinum and palladium supply/demand data for 2008. Did you notice the significant drop in the Russian supply? The annual sale of Russian Strategic palladium stockpiles, about 1.5M to 2M ounces a year, finally ENDED! Back on June 11, 08, the palladium market had a knee-jerk response when Norilsk Nickel (NILSY.PK) merely suggested the termination of the stockpiled palladium sale. Now that it really is ENDING, how will people react when it becomes widely known? Russia maintains a Defense Strategic Stockpile for its own wartime needs, not for selling PGM metals below cost to the world.
In Impala's estimates, recycling accounts for 1.1M ounces of palladium supply in 2008. The CPM Group estimated the recycling to be as high as 1.6M ounces a year. The good news is this supply will also be removed in 2009. A new catalytic converter contains about four grams of palladium, while an old one has about two grams left. Recycling recovers about 75%, or 1.5 grams each, worth about $9 in palladium at today's price. The PGM recycling process is a long, complicated and costly one, and at today's low price, there is simply no incentive for recycling. Stillwater Mining (SWC) is better off dropping the PGM recycling business and concentrating on mining. This could also boost the metal's market price, as it would free-up large working capital that was locked up in the recycling materials inventory, and enhance the company's balance sheet, as a result.
Upon recycling, more than 1M ounces of palladium supply are removed. Mining production also dropped significantly. Norilsk Nickel estimated that the 2009 palladium production would drop to 2.6M ounces from 3.0M as it now mines the nickel rich and palladium poor minerals to reduce cost. It also processes third party nickel concentrates, which contain no palladium. North America Palladium (PAL) shut the mine down earlier, thereby removing another 0.280M ounces supply, South Africa also saw about 10% drop of palladium production, or 0.25M ounces, and Stillwater Mining expects reduced production in 2009, as well.
When you add up all the supply disruptions and the halting of the Russian stockpile sale, despite of a 5.3% drop in auto catalyst demand, we are looking at an unprecedented palladium deficit in 2009. This is far greater than in any other precious metal, and we haven't even added in potential investor demands! Who wouldn't want to buy some palladium if you know what's going on!
The collapse of PGM prices in recent months was NOT due to fundamentals; rather it was due to investment funds as well as big automakers, especially General Motors (GM) were forced to liquidate their precious metals holdings in order to raise cash. Automakers normally keep six months of PGM metals supply to weather any supply shocks, and when GM struggled for its survival, it had to sell its PGM inventory at a cheap price. Now that GM says, it can expect to survive without more government money, and in light of the looming shortage, it's time for GM to rebuild its inventory.
Palladium has by far the strongest fundamentals and the best potential for an explosive rally, among all precious metals. I still believe that due to the huge above ground inventory of gold, and the current price above the intrinsic value of production cost, the yellow metal has little room to gain in real value. Gold is a liquid and stable currency, but has no investment value if you are looking for gains.
I like silver better than gold. Silver is mostly a by-product metal so the supply is price-inelastic. As a safe haven investment, silver is more appealing to Joe-Six-Packs as it is more affordable, while gold is more appealing to rich people due to its high density of value. Most people on the GoldIsMoney forum believe silver is more bullish.
However, none of the silver bugs even presented specific and quantitative data on silver supply and demand so I wanted to take a closer look. Photography usage of silver, which traditionally accounts for one-third of the demand, is now diminished as digital cameras replace analog ones, and sterling silverware like spoons and goblets, is less popular than in the past. Industrial demand saw some increase in recent years, but is uncertain as the global economy goes into recession.
The biggest uncertainty factor is silver jewelry. Silver jewelry is low-end, cheap jewelry, which consists of those cheap bling-blings that you pick up in a mall or a grocery store, when you happen to have a few extra dollars and you just like what you see. Therefore, in a sense, silver jewelry is a discretionary spending item and is vulnerable in a slowing economy.
High-end jewelry, which is made of gold, especially platinum and palladium, is different from silver. This type of jewelry is most likely purchased as a special gift rather than a casual purchase. No one would buy a silver earring or necklace as an engagement gift, for example, and your fiancé would expect a diamond ring made of platinum, palladium or white gold. People will not take their platinum wedding bands to pawnshops for cash, but they are perfectly happy to toss out old pieces of silver jewelry.
Unlike PGM recycling, which is complicated and costly, recycling from scrap silver jewelries is simple and inexpensive as the materials contain high concentration of silver. Silver recycling remained at near constant high level over the past years, regardless of silver price. The PGM metals are different as low PGM prices discourage recycling and reduce the supply.
I believe silver remains bullish due to investment demand, but due to uncertainties in industry demand, I recently reduced my silver mining stock holdings in Silver Standard Resources Inc. (SSRI), Silver Standard Resources Inc. (PAAS) and Hecla Mining Co. (HL), and concentrated more on palladium mining stocks, SWC and PAL. The continued strong rally in Baltic Dry Shipping Index (BDI) shows that I also made the right call on the shipping sector. So, I continue to hold large positions in shipping stocks, like Excel Maritime Carriers Ltd. (EXM), Eagle Bulk Shipping Inc. (EGLE), Genco Shipping & Trading Ltd. (GNK), OceanFreight Inc. (OCNF) and DryShips Inc. (DRYS).
Full Disclosure: The Author is heavily invested in palladium mining stock SWC and shipping stocks EXM, EGLE, GNK, OCNF and DRYS. I also hold positions in PAL, USO and OMG.
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This article has 15 comments:
Keep up the great work!
As you see in my analysis, Implats' palladium supply estimate is still overly optimistic and does not take into account of supply destruction so the 2009 supply shortage will be much wider. The 1.1M palladium recycling supply simply will NOT be there, as the cost of processing recycling material can not be justified at current low palladium price.
I am trying to convince SWC to dedicate part of their palladium supply to make them into standard bars and rounds for investment buying. Lots of people want to buy palladium but there are few suitable products, with high premium. SWC and PAL can help solve this bottleneck problem.
Russian palladium 1 oz coins were available a while back too at about a $100/oz premium, but I do not see any now on Apmex.
Ref Apmex, www.apmex.com/Category...
It was indeed true a couple of months ago the premium of palladium bars at APMEX were higher. There were almost nothing palladium available at the time so it was not surprising the premium was high.
Now, on APMEX, the availability of palladium bars seems to have improved that's why the premium has dropped a bit. But at $60 permium per ounce that's still pretty high.
www.apmex.com/Category...
Do you notice that there is actually NO palladium bars in ready to shop stockpile at APMEX. There are only two kinds of Pamp Suisse palladium bars. Both are on delayed and can only ship in February.
It looks to me in Switzerland they are turning big 100 ounces Russian palladium bars into the one ounce Pamp Suisse bars to fetch the profit on the high premium. Who wouldn't want make money from the premium? Each ounce of palladium that is turned into a one ounce Pamp Suisse bar, is an ounce taken away by investment demand and no longer available to industry users. That's very bullish.
www.iii.co.uk/news/?ty...
Obviously the government is helping its metal giants including Norilsk Nickel. How to help? Help them boost metal prices by purchasing and hoarding away their metal products, particularly precious metals like platinum and palladium.
This is yet one more evidence that not only Russian Government will no longer sell palladium from its stockpile. It is now actually BUYING the palladium metals and re-stock its strategic stockpile inventory of palladium. This is super bullish for palladium.
Look at the 2000/2001 history, there was merely a false rumor that Russian Government was going to halt stockpile palladium sale. The false rumor was enough to drive palladium price from $300 all the way to $1100. Today what we have is not a rumor, but a FACT that there will be no more Russian government sale. Not only that, there will be net government buying for the sole purpose of boosting price to help its metal giants. Don't you think this should send palladium flying?
We can get you as much Palladuim, Platinum, Gold, Silver and Rhodium that you need in bars.
On Jan 14 02:44 PM Mark Anthony wrote:
> Another factor is investors will be looking for buying physical precious
> metals as safe haven investment. Investment buying will be an important
> part of the physical demand. Given the bullish fundamental of pallaidum,
> of course this metal is a much more attractive buy than gold and
> silver.
>
> I am trying to convince SWC to dedicate part of their palladium supply
> to make them into standard bars and rounds for investment buying.
> Lots of people want to buy palladium but there are few suitable products,
> with high premium. SWC and PAL can help solve this bottleneck problem.
>
On Jan 15 01:40 PM Loufreax wrote:
>
> We can get you as much Palladuim, Platinum, Gold, Silver and Rhodium
> that you need in bars.
>
> On Jan 14 02:44 PM Mark Anthony wrote:
Silver is a better investment than gold right now because it has more industrial uses. As such, it's been beaten down more, while the price of gold stays relatively stable since it's mostly perceived as a store of value and has limited applications. I think both gold and silver will do well this year. If the price of the gold miners stops to drop again, I think they become strong buys --- otherwise, they are only slightly undervalued.
I'd jump out of dry bulk if you made huge gains on it already. I bought in heavily for a portfolio management application (KaChing on Facebook), but have been selling off my positions and taking the 100%+ profits. The problem with dry-bulk is that the long-term outlook is still very dismal, especially for the companies running larger vessels. Also, many of them are overwhelmed with debt. If the prices retreat significantly again, I'd start buying in, but otherwise, given the risk and uncertainty involved, most of them look near-adequatedly priced right now.
On Jan 15 01:40 PM Loufreax wrote:
>
> We can get you as much Palladuim, Platinum, Gold, Silver and Rhodium
> that you need in bars.
>
> On Jan 14 02:44 PM Mark Anthony wrote:
You can get Rhodium in bars.That's something I would like to know more about because the only place I have been able to get that one is on ebay and only occasionally and certainly not as bars.
Whats the minimum and how much premium.
Looked at you site but I always get discouraged and usually never go back if I see no pricing examples and lost interest in trying so they could be there hidden. Even older pricing examples can give one an idea on what to expect otherwise I just assume they charge so high that they are too embarrassed to show. That defiantly scares me off almost every time and you cant list all the sites I just walk away from due to that, even when I would not have minded paying extra if I didn't have to work so hard to find out.
PGM demand will drop further, especially since one industrial use is catalytic converters. Another major use is jewelry. I am affiliated with two jewelers. No premium platinum jewelry is moving - Gold & silver are selling.
With Russia able to buy cheaply, they use it as a backing for currency, weaponry, and as a financial hedge. Once the price stays up (not before 2010, since '08 started a prolonged reduction in demand) they will start selling again. War is the only thing that could drive prices up, and I'd rather just sit on my losses.
I hope I am wrong, and know I'll get hammered for this statement, but:
I may add to SWC & PTM *when* it hits a new 2009 low.
www.nornik.ru/_upload/...
As I explained, the drop of palladium production is because Norilsk will be forced to produce ores that is nickel rich and palladium poor, to save cost.
So if Norilsk made the decision to start mining the part of ores that are nickel rich and palladium poor, some time around August or September, 2008. Then that part of production are just now beginning to reach the refining stage and showing its effect in significantly dropped palladium production. As time goes on in 2009, the ore grade effect will be more spelled out, leading to much bigger palladium production drop in 2009.
Buy SWC now before the global palladium shortage becomes more obvious to the world!
There is a very, very big difference between reducing some of your silver holdings like SSRI, PAAS and HL, and eliminating them entirely. Whatever happened to SLV?
Its easier to follow your disclosures this way isn't it?