Palladium On The Verge Of A Break Out

| About: ETFS Physical (PALL)
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Palladium price fundamentals have been growing stronger and stronger.

A possible catalyst has emerged due to tensions between Ukraine and Russia.

Russian palladium stockpiles are depleted.

Palladium (NYSEARCA:PALL) is one of the platinum group metals (PGMs) which is used in autocatalysts, electronics, dentistry, jewelry and is also seen as a near equivalent of precious metals.

If we look at a five-year price chart for palladium, we can see that palladium is on the verge of a breakout as the price range is narrowing to the upside (Chart 1).

Palladium Price (Chart 1)

Not only the technicals are promising, also the fundamentals are strong and have become even more favourable just recently on the tensions between Ukraine and Russia.

Palladium Mine Supply (Chart 2)

As many know, the largest quantity of palladium is coming from South Africa and Russia. The supply has been going up till 2011 and has fallen ever since (Chart 2). Palladium is typically produced as a by-product. For example, South-African platinum mines have palladium as by-product and produce around 38% of the global supply of palladium. Russia supplies around 40% of global supply from its nickel, cobalt and copper mines. We know of the dire situation in the South African platinum mines where labor strikes over higher wages are very common. This problem has pushed down platinum production and as a consequence also palladium production. I don't expect a recovery in South African supplies.

Norilsk Nickel predicts that palladium supply will keep coming down and the current palladium deficit of 740,000 ounces will be here to stay for a long time. The deficit is said to increase to over a million ounces in 2014. Although demand for palladium is coming down due to lower vehicle sales, supply is also coming down fast, though I have a suspicion that Chinese vehicle demand will continue to grow in the future.

The key news item recently is of course the Russian-Ukraine situation. Russia has large stockpiles of palladium and has been filling the supply demand gap by selling off its stockpiles. Many believe though that these palladium stockpiles have gone down considerably. Russia used to supply 2 million ounces of palladium annually, this came down to 1 million ounces in 2010 and is now 100,000 ounces in 2013. So we don't need to rely on the supply from Russia's stockpiles anymore.

Then how about Russian palladium production? The most recent threat of sanctions from the U.S. against Russia has sparked a whole new ball game. These sanctions will disrupt exports from Russia as investors flee the Russian stock market. Investment in Russia will go down as well as the Russian ruble. The effect is that Russia will hike interest rates and higher interest rates will hurt the economy.

Sanctions can come in many ways like imposing tariffs, taxes, export sanctions, embargoes. All of these will disrupt the Russian economy. Not only the price of palladium will be higher, several other commodities like natural gas, oil and wheat have been rising too.

The conclusion is that palladium has strong fundamentals:

  • The palladium deficit is going to increase
  • Russia's stockpiles are near depletion
  • South Africa has a continuous trend of a decreasing mine supply
  • Looming U.S. sanctions are a catalyst for higher palladium prices

To profit from higher palladium price investors can buy physical palladium, for example: Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.