Is Palladium Overpriced Even At Less Than $300/Ounce?

Implications: If we believe the news out of Russia then there must be palladium aplenty residing in the vaults of, or under the control of, Norilsk, the world's largest palladium producer.

Analysis: Oleg Deripaska, the principal owner of RUSAL, the world's largest (and Russian based) aluminum producer has set his sights on gaining control of Norilsk, the (Russian and) world's largest nickel and palladium producer; he, Deripaska, already has 25% of Norilsk's shares. But Deripaska is being blocked from taking control even of the Board of Directors of Norilsk by another Russian 'oligarch,' Victor Potanin, who managed to 'pack' Norilsk's Board and elect (and then dismiss shortly thereafter) his own CEO for Norilsk.

The western so-called 'precious metals' commodity reporting press has managed to ignore Deripaska's most recent comments on Norilsk, but they are worth looking at if you have an interest in the future of palladium or of nickel and cobalt.

Oleg Deripaska has stated that some Norilsk operations are so environmentally challenged that they are in danger of being "shut down." If this is true then the world's largest producer of palladium, and one of the world's top three producers of nickel and cobalt is in danger of sharply reducing its production of palladium, nickel, and cobalt. This "possibility" if it were said of a South African platinum, nickel, or cobalt producer, or a Chinese producer of tungsten would have caused the prices of any or all of those metals to skyrocket just as it has in the recent past when South Africa entered its electric power shortage crisis and China imposed allocation reductions on exports and raised the export taxes on many minor metals including tungsten.

So, what happened?

Even after Derpiaska'a statement of the dire danger of a "shut down" the prices for palladium, nickel, and cobalt dropped! The price of palladium, in particular has dropped by more than 40%.

Even accepting the fact that the world commodity metal market is dropping sharply at the present time as the sole explanation for the zero impact on palladium, nickel, and cobalt prices that occurred when Deripaska made his prediction leaves me skeptical..

One possible explanation is, of course,  that, at least for palladium, there is already a vast oversupply under the control of Norilsk. Analysts and pundits since 2002 have been attributing low palladium prices to the release of accumulated old inventory from Norilsk  Each year since 2002 we have been assured was to see the last of the old inventory so that the next year would see a jump. Yet in all that time the price of palladium did nothing more than follow the dollar's decline against the Euro. The price seemed to be going up slowly, but in fact it was only moving in lock step with the Euro's rise against the dollar.

It must be noted that if one had had the misfortune to buy palladium  in Euros in 2002 you would now be holding palladium worth only 60% (in Euros) what it was worth in 2002 almost exactly the same situation as dollars that you might have purchased in 2002 with Euros. Converting that palladium today into dollars would give you palladium at less than $160 per ounce! You still would have made a substantial profit by doing the same thing (buying in Euros in 2002 and selling for dollars in 2008) with nickel and cobalt and many other metals, howver.

It is difficule then to argue against the conclusion that there must therefore be simply less demand now for palladium than there was in 2002 or that there is an oversupply. In fact the world today, in 2008, is producing as many as 25% more cars using catalytic converters than it was in 2002-The slip in US domestic demand is simply drowned by the increase in global demand. Therefore the answer to the palladium price collapse seems to be simply that it is in such oversupply that even the cessation of the production of new palladium by Norilsk would be unimportant as the market has indicated by its total lack of interest in any possible cessation of Norisk production of palladium.

Norilsk shares have dropped by 40% since the battle between Deripaska and Potanin got heated, but this is of great help to Deripaska who is trying to acquire shares, so he must not be disappointed by the results of the boardroom battle and the threat of production interruptions.

Some investors are ignorant of the geoeconomics of palladium, platinum, and rhodium. They think that the production of palladium is somehow linked to that of platinum and rhodium. It is not connected in any way geologically; the metals platinum and rhodium are mined together because rhodium is only found as a byproduct of platinum, but palladium production is not related to platinum and rhodium production. Most of the world's platinum and rhodium come from southern Africa; most of the  world's palaldium comes from Russia. 

Palladium is dropping I believe, because it is simply in oversupply in a dropping market, and the myth of an impending shortage or exhasution of inventory reserves can no longer be sustained.