Palladium’s shine fails to light up SA miners

Platinum’s lesser-known cousin keeps going from strength to strength. Palladium, once considered an unattractive byproduct of platinum mining until the rise of catalytic converters in the 1970s, is hitting new records. Spot metal peaked at an all-time high of $1,344.41 an ounce on Wednesday. In the past month, it’s been more costly than gold, which hasn’t happened since 2002.

You might think this will spark an immediate reversal and slump, as is often the case with commodity prices. That may not happen, though, because prices aren’t high enough to prompt a supply surge.

Palladium and platinum are part of an intertwined group of metals that occur in only Southern Africa, Siberia and, in smaller amounts, the US and Canada. These platinum group metals crop up in the same deposits, so it’s next to impossible to produce platinum without getting some palladium, and vice versa.

That’s important, because the diesel scandals engulfing the global car industry in recent years are reducing industrial demand for platinum, which is used more in diesel catalytic converters. Petrol-engine cars use more palladium in their exhaust scrubbers — and while that sector isn’t looking too hot right now either, the metals are moving in opposite directions. Autocatalyst demand for platinum has been falling for three years, according to Johnson Matthey, even as the industry’s consumption of palladium rises.

For the Southern African miners who mine about 80% of the world’s platinum and nearly half its palladium, this is a problem. Even at current elevated palladium prices, they’re struggling. With platinum hovering around $800 (R11,000) an ounce for the past six months, only about a quarter of their deep, dangerous and perennially strike threatened mines are seeing market prices above their all-in production costs, according to data from Minxcon Group.

That’s not a one-off situation. For most of the past decade the five miners who dominate the Southern African industry —Anglo American Platinum, Impala Platinum, Lonmin , Sibanye Gold and Northam Platinum — have failed to crack a double-digit return on equity.

Prices for by-product palladium will have to get a whole lot higher to tempt them to dig up yet more of their money-losing main product, platinum.

There’s one way out of this toxic relationship, and it’s buried under the Siberian permafrost.

In contrast to the tarnished Southern African platinum industry, MMC Norilsk Nickel is a truly precious metal. While palladium makes up about a third of the platinum-group output from South African mines, in Norilsk’s pits in Siberia the ratio is closer to 80%. As a result, investors prepared to put up with the political and shareholder risks around Norilsk are sitting on a very attractive stock.

The trouble with Norilsk is it’s not rushing to produce much more. Its forecast for platinum-group output will edge up by five tons between 2018 and 2020, according to its latest production guidance. Further out, there are plans to increase ore output from its Talnakh pit by about 20% by 2025.

The real driver of palladium catalyst demand in recent years has been not so much rising volumes of car sales, but tighter emissions regulations that require larger amounts of the metal in each car sold. Despite US attempts to wind such rules back, that should make palladium still more attractive in the rest of the world.

But at some point over the next decade — when electric cars start to seriously eat into petrol’s market share, and those Russian projects come on stream — palladium’s time in the sun is going to end. Right now, though, it’s still gleaming.