On the heels of continuing tensions between Russia and Ukraine, palladium hit its highest price in more than 13 years this week, topping out at $911 an ounce. It has been the best performing precious metal so far this year.
Will this cause a rush to increase supply? Many analysts are saying the high price likely won’t lead to a rise in new mines or exploration due to several factors that are unique to palladium.
The primary reason is that the metal is extremely rare and difficult to find. The largest deposits are located in Russia and South Africa, with smaller deposits found in North America. The second reason why there won’t be a rush for new palladium mines is tied to the first reason. Russia and South Africa account for more than 80% of the world’s supply and both countries have been embroiled in geopolitical and economic turmoil in recent months.
Much to the dismay of the West, Russia has been pushing slowly into Ukraine while South Africa has been dealing with labor wage disputes among miners that have been coupled with high electricity prices and underdeveloped power grids.
Peter Major, a mining analyst at Cadiz Corporate Solutions told Forbes “We’ve had no productivity increases in 10 or 12 years but we’ve had double-digit wage increases for 12 years averaging 11.5%.”
“I don’t think you’ll see anymore shafts sunk with mill refining here. Look at the gold mines, they’re just mining out what’s there,” he added. “Anyone who’s sunk new shafts at a new mine will never show an internal rate of return. The only way you get a return on investment now is maximizing what you’ve already got.”
The general consensus is that the crisis in Ukraine is the fuel behind the recent rise in palladium prices, as prices were mostly unaffected when South Africa’s problems first appeared. They didn’t start moving until the news started coming in from Russia.
In 2001, palladium prices reached an all-time high of $1,100 an ounce when Russia didn’t grant export quotas. It caused a worldwide shortage of the metal and many U.S. car parts manufacturers were forced to pay the high spot price.
Bernard Dahdah, a precious metals analyst at Natixis Global Asset Management told Forbes, “You can look back at Russia in 2001 when they had internal political issues that meant that they couldn’t supply the market with palladium anymore and prices reached $1,000 an ounce,” Dahdah said. “So, U.S. palladium car producers lost something like $1.5 billion because they were buying spots on the market at levels close to $1,000.”
“Russia then opened the market and flooded it with palladium and they lost all that money,” he added.
It’s an ominous word of caution for those thinking that palladium could keep gaining forever.
Palladium is used mostly in the manufacturing of catalytic converters for automobiles.