Friday, September 7, 2007

Palladium reserves and Palladium shortage

Over the last few years there has been a lot of talking about diminishing oil reserves and peak oil production: the time at which the peak in oil production will occur will depend on the rate of consumption and amount of ultimate oil reserves in place. The current mean estimate of proven oil reserves are estimated between 950 and 100 billion barrels, at the current production rates there are sufficient proven reserves to meet oil demand for at least some 40 years, the current mean estimate for the peak of world oil production is between year 2010 and 2015.

But what about the PGMs outlook? There is little or no literature about the PGM expected peak production and reserve average life estimate, this is quite strange considering that PGMs are the most rare metals on earth, and their usage is widespread and vital for the world economy.
Considering as an anomaly this lack of information and material about the PGM reserves life outlook, I decided to do some elementary (I am not a geologist) calculation and estimate. I will focus on Palladium reserves in this study.

The starting point of my research is the current USGS estimate of existing PGM reserves reported in the table below:


The USGS defines reserves (reported in kilograms in the above table) as the part of the reserve base that could be economically extracted or produced at the time of determination. The term reserves need no signify that extraction facilities are in place and operative.

Starting from this data I have tried to estimate the existing world Palladium reserves in Troy Ounces from the above PGM aggregate figures: I assumed that 77% of North America PGM reserves consist of Palladium, 85% of Russia PGM reserves consist of Palladium and 30% of the South African and rest of the world reserves consist of Palladium. It is known that deposits in the North hemisphere are Palladium rich and in the southern hemisphere are Platinum rich, following the calculation based on these assumption I obtained the table below for the existing world Palladium reserves (in troy ounces) as base for the successive estimates.



It must be noted that 2006 reserve estimate is the highest ever reported from the USGS.

To estimate the production figures for the upcoming years I used the following annual output growth rate: 3% for South Africa, 1% for North America, 2% fro Russia and 5% for the rest of the world. It must also be noted that South African, North American and Russian PGM producers are predicting mining output growth in excess of 5% for the next years, if that was the case, then my estimate for the depletion of reserves would result too conservative. Most PGMs producers however have a bad track record as far as their ability to match their growth promises is concerned, for this reason I am more confident with my slower rate of growth estimation.

Using the above assumption and existing world reserves as starting point of my analysis I found a very surprising and alarming result: Palladium reserves may run out at the same time of oil reserves. The chart below shows the world Palladium reserves (in thousands) and their gradual depletion over the next 50 years. US reserves may be over by 2046, Russian reserves by 2041 and South African reserves by 2080. It must be noted that output rates may decrease with diminishing reserves so the actual chart may look more bell shaped than my estimate chart.


What can change this outlook?

-Best case scenario: new deposit are found (for example exploration companies are searching for PGM in Alaska and Finland), higher PGM prices increase the existing reserves (the upside is small however since the USGS estimates that existing PGM resources are just 20% higher than reserves). In this scenario we will run out of PGM later than my estimate.

-Worst case scenario: no major deposits are found and producers increase their output faster than my estimate, in this case we will run out of PGM sooner.

Conclusions:

It looks like a sound long term investment to be long and hold into the next decades PGM producers and PGM exploration companies as their reserves will become more and more scarce their will be also more and more valuable.

DISCLAIMER: Please do your own diligence. I am not responsible for your trading decisions, I am not an investment advisor/professional. This blog, is general market commentary only. It is not intended as specific advice. You should talk to your own investment professionals for specific advice.

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