Palladium Short Squeeze: 20% Of Global Production Is Halted
Summary
- An accident at the mines of Nornickel, a major palladium producer in the world, has halted production of 20% of global palladium supply.
- Palladium market is already in short supply, but the situation at Nornickel will further worsen the market equilibrium.
- Regardless of how the situation at the mines will be resolved, the market may experience a price shock.
Introduction
Nornickel (OTC:NILSY) is the major world’s palladium (Commodity:XPDUSA) and high-quality nickel producer and also a major producer of platinum and copper. The company produced a total of 2,826 thousand ounces of palladium (80115 kg) in 2020, that accounts for 40% of palladium world production.
On February 24, it became known that operations at two of Nornickel’s largest mines, Oktyabrsky and Taimyrsky, were halted due to flooding by natural groundwater.
Oktyabrsky and Taimyrsky produced 36% of all Nornickel’s output in 2020. These two mines are the largest copper-nickel deposits and key assets of Nornickel, with a combined production of 9.5 million tons of ore per year.
To date, the company has not provided details on the extent of the incident. One of the risks is that the Oktyabrsky and Taimyrsky mines may be completely lost. Due to the constant increase in water inflow, there is a high probability that the sinking cannot be eliminated, a rumour that is currently being discussed in the Russian market.
Palladium market overview
Source: Statista.com, company data
This infographic displays the distribution of palladium production in the world by producer. Global output of palladium in 2020 declined by 7%, however Nornickel is again the major palladium producer with output of 80,115 kg cumulatively accounting for 40% of global palladium production and $6.5 billion. The Oktyabrsky and Taimyrsky mines, which were reportedly flooded, account for roughly 50% of the company’s palladium output. The influence of these mines on palladium price dynamics is huge, so any negative news about further production recovery will immediately be reflected in the price (Palladium production global distribution by company 2019 | Statista).
Palladium production as well as sales declined by about 7% in 2020 on the background of industrial demand decrease due to Covid-19, however already now many industries are on a recovery course, which will certainly boost palladium demand. (Palladium mine production worldwide by country 2020 | Statista).
Demand for the platinum group metal continues to rise as Europe and China impose increasingly stringent environmental standards for cars with gasoline engines. The thing is that palladium is necessary for catalyst production that reduce the toxicity of exhaust gases. The stricter the authorities’ requirements for emissions, the more palladium is needed for each car, and therefore for the global car fleet as a whole.
The palladium market has been in short supply since 2016.
Any shock in palladium production may worsen the shortage and cause the cost of palladium to skyrocket.
Palladium Is Soaring And Offers A Few Other Investment Opportunities (NYSEARCA:PALL)
What happened in Norilsk
On February 24, Nornickel announced that it was suspending production at the linked Oktyabrsky and Taimyrsky mines due to groundwater inflow. These mines provided half of the company's annual production.
Videos of the flooded mines later appeared on local television and in the Russian media.
One of the videos is dated February 5. This may mean that the inflow of groundwater began long before this information became public. The accident at the mines has been going on for more than a month.
The company did not comment on the terms of production recovery at the Oktyabrsky and Taimyrsky mines.
On March 3, the CEO of the company, Vladimir Potanin, gave comments on the accident to Russian media:
Localization of flooded areas, laying of cement to localize the waterlogging is in progress. Colleagues expect to reach a final turning point in this situation and stabilize it by March 9.
On March 9, Nornickel will hold a board meeting at which a plan of normal production volumes achievement will be approved. At the same time the production volumes that we have at risk will be determined. [...] the accident will be of a material nature, i.e. there will be certain losses for production.
Despite this, neither Vladimir Potanin nor the company commented on the terms of the production restoration at the mines. This may indicate that the company has no understanding of these terms. The market is waiting for more official comments on March 9.
How long will it take to restore palladium production
Russian investors are discussing several scenarios for the future development of Nornickel's mines, starting from the fact that the suspension of the mines may take from several weeks to a complete loss of the mines for several years. Let us consider three options: positive, neutral and negative.
The positive scenario: Production will be restored within a few months.
Part of the media in Russia believes that production has not been affected much, and the scale of the accident is exaggerated. In this case, production may be restored within 1 month.
In this case, 1 month of palladium production – 1.7% of the total palladium supply for the year – would fall out of the supply.
Neutral scenario: Mining will be restored before the end of the year.
If the company manages to build promptly a concrete cofferdam and stop the inflow of water, it could take, according to various estimates, 6-9 months to restore production, as it takes time to pump out the water.
In this case, 6-9 months of mining – 10-15% of the palladium supply – would fall out of the palladium supply.
The negative scenario: Fields will be lost for many years.
If the company fails to stop the flow of water, the mines could be lost for many years. This scenario occurred at Alrosa's Mir mine in 2017 (to be talked below).
In this scenario, 20% of the supply is abruptly removed from the market.
A similar case: The flooding of Alrosa's Mir mine in 2017.
The flooding of Mir, located below the bottom of the depleted open pit, occurred on August 4, 2017. Water that had been accumulated at the bottom of the giant pit suddenly gushed into the workings. The Mir mine was the company's major mining asset until 2017. According to many experts, the situation will cause a decline in global supply of natural diamonds for the next 10 years with a loss of about 15 million carats of diamonds.
Conclusion
In any of the scenarios, palladium and its ETF prices like PALL may face a price shock. Regardless of how the situation will unfold at Nornickel, at the moment of writing this article, the global supply of palladium has been cut by 20%.
Remarkably, many experts predicted (Palladium market deficit to narrow significantly in 2020 - report - Mining.com) that palladium prices would go down for the first time since 2009, amid falling rental rates and car sales triggered by the pandemic. However, with the current mines' situation this seems unlikely.
Update: On March 9, 2021 Nornickel has issued a press-release commenting on the situation.
This article was written by
Analyst’s Disclosure: I/we 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (31)
