Thursday, September 13, 2007

Russian Palladium stockpiles

The Russian Federation dominates world palladium production and supply through Norilsk Nickel output and through strategic state stockpiles. These Russian palladium stockpiles were built in times of excess supply, during the seventies and eighties, and used in order to balance the market. During the nineties when Norilsk Nickel production could not meet growing palladium demand from the autocatalyst sector, the gap was filled by State stockpiles from Gokhran, the Russian precious metals agency (which is part of the Ministry of Finance), and by the Russian Central Bank sales. The de-stocking process of the nineties was quite aggressive because of the need of the Russian government to raise hard currency during the first delicate years of the post-soviet era and because of the strong western carmakers demand of Palladium for autocalysts due to tightening emission control regulations. It is estimated that between 1993 and 2001 approximately 18 million ounces of Palladium were sold from the Russian stockpiles to western markets. How much Palladium is left in the Russian stockpiles? The actual level of Russian stockpiles of palladium is a closely guarded State secret, for this reason it is a difficult task to estimate the real size of these stockpiles: some interesting research has been done by Alan Williamson and of HSBC and John Reade by UBS, their research papers can be easily find in the web using a search engine like google, I suggest to those interested in this matter to read those papers, they are really well written and very informative.

The common view and consensus in the market is that there are still significant stockpiles in Russia and that part of those stockpiles are now held in Switzerland, this consensus is one of the main reason that make most of the analyst neutral or slightly bearish on the Palladium fundamentals despite growing demand and contracting mining output.

Despite the bearish analysts consensus view, the price of Palladium has been rising for two years and this is in sharp contradiction to the bearish consensus on its fundamentals, since I believe that the market price of a commodity is an efficient indicator of its fundamentals I have started to question the analysts bearish consensus and I decided to do some further research in order find out more about the actual level of Russian palladium stockpiles: either the analysts are wrong or the Palladium price is wrong.

Some interesting observation on this subject are also found on a friend’s blog, however I would like to add to this friend simple and straightforward observations some analytical data and produce a rigorous fundamental study on this matter.

To start my research first it is necessary to find a certain level Russian stockpiles in a particular year in order to study flows of metals from that particular year in and out of Russia. The most reasonable starting year must be year 2001 since there is a quite broad consensus on the levels of Russian stockpiles in that year. It is well known that Valery Rudakov of Gokhran in 2000 said that the Russian stockpiles were approximately 6 -10 million ounces at that time (I will assume 8 million ounces right in the middle of the range) and it is also well know that in August 2001 Norilsk Nickel suspended for the rest of the year sales of Palladium in the spot market stocking probably up to a couple of million ounces. Using the above information it can be assumed that at the end of 2001 a realistic estimate of Russian stockpiles of Palladium can be 10 million ounces.

Now I will use Russian Palladium production data and Russian Palladium export data from 2002 to 2006 to estimate the change of the Palladium stockpile level: it must be noted that Russia does not provide exports data of Palladium, however, the rest of the world releases import data of Palladium from Russia so the export data can be worked out.

I will also analyse the destination countries of the Russian palladium export since some of then are end users of Palladium (i.e. they consume the imported Palladium) others are not end users and may trade, transform and resell or simply restock the metal.

The chart below shows the de-stocking process implied by the net difference between Russian export and production of Palladium.

The chart below shows the resulting change of level in the Russian stockpiles of Palladium.


Accordingly to my calculations the stockpiles of Palladium in Russia are 3.1 million ounces at the end of 2006: these 3 million ounces are probably held by the Russian central bank since it is known that Norilsk Nickel has no stocks left.

Now it is crucial to analyse from customs data where the Russian exports of Palladium from 2002 and 2006 went: the table below shows the breakdown of Russian exports by destination accordingly to importing countries customs data (in ounces):

The main importer of Russian Palladium export is USA (7 million ounces) followed by Switzerland (6.8 million ounces) and Japan (4.8 million ounces): USA and Japan consume Russian Palladium mainly to produce autocalysts, as well as Korea. Italy is a car manufacturer country and a jewellery country. UK has imported 1.2 million ounces of Russian Palaldium, but the bulk of it was shipped to USA as payment for Norilsk acquisition of Stillwater Mining in 2003. China is also an importer of Russian Palladium and ots imports are already significant if counted together with Hong Kong imports (China+ Hong Kong imported more than 600K ounces from Russia) and I expect China to become within 2-3 years the main importer of Russian Palladium.

The anomaly of the above data is Switzerland since it is not and end-user/consuming country but a hub for international transactions in palladium. During the last 5 years Switzerland imported 6.8 million ounces from Russia, the consensus view of the analysts community is that the bulk of it is owned by the Russian central bank and it is just in Swiss custody, if that was true, then Russian stockpiles would still be 10 millions ounces as well as in 2000, however I do not believe to this consensus, so I made some further analysis of the Swiss Customs data on flows of Palladium.

I have collected and analysed Swiss import and export data of Palladium from 2002 to 2006 with its main trade partners in order to figure out where are now the 6.8 million ounces of Russian Palladium supposed to be held in Switzerland vaults, the results of my analysis are very interesting as shown in the table below:


From 2002 to 2006 Switzerland has been a net exporter of Palladium: 1.4 million ounced were shipped to Hong Kong ( therefore China through Hong Kong has bought directly from Russia and indirectly from Switzerland as much as 3 million ounces of Palladium in the last 5 years). Switzerland has also shipped a net 1 million ounces to US and 600k to Japan. Summing the net export (Export-Import) it looks like Switzerland has been a net exporter of 3,4 million ounces of Palladium from 2002 to 2006.

Using the above data it is clear that now Switzerland has only 3,4 million ounces left of the original 6,8 million ounces imported from Russia. It must also be noted that not all of this remaining 3,4 million ounces of Palladium left inside Switzerland belong to Russia: part of it may have well changed hands: Switzerland launched in 2007 a Palladium backed ETF, Credit Swiss has forged Palladium bars and coins through Valcambi, Novartis Pension Fund has been reported to buy physical Palladium among other precious metals to diversify its assets.

CONCLUSION:

The level of Russian stockpiles has been shrinking significantly over the last few years, there may be, accordingly to my calculations, no more than 3 million ounces left inside Russia and approximately a couple of million ounces left in Switzerland: the Palladium market has absorbed unnoticed the Russian destocking of the last few years and has been trending higher, a sign of an incredible underling strength. The level of the stocks left is just worth 10 months of yearly Palladium mining output, with increasing demand coming into the market from China I am very bullish on the Palladium prospects despite the bearish consensus out there.


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.


5 comments:

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. said...

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