Tuesday, August 19, 2008

Russia, Georgia-Nato crisis: Palladium supply disruption looming?

We are living in a world of increasing geopolitical tensions (terrorism, nuclear proliferation, new superpowers’ confrontation, oil crises, new cold war…): the world is changing and a new international equilibrium must still be found. The latest front in this scenario and the most immediate source of potential troubles is the Russia-Georgia crisis with the external involvement of the USA and its NATO allies. NATO Secretary-General Jaap de Hoop Scheffer said on Tuesday August 19, 2008 that there can be no business as usual with Russia under the present circumstances. The announcement came after foreign ministers from NATO member nations gathered in Belgium for an emergency meeting over the crisis between Russia and Georgia which also involved U.S. Secretary of State Condoleezza Rice. Rice said ministers would also will discuss how to support states on Russia's borders that have already joined NATO, including Poland, Latvia, Lithuania and Estonia. I will focus here on the potential consequences for PGMs and SWC of an escalation in the Georgia crisis. Russia produces 40% of the annual Palladium mining supply and owns the only Palladium stock existing in the world (roughly 4 million ounces or approximately 6 months worth of Global consumption), Russian sales of mined Palladium and stocked Palladium account for more than 50% of the world annual supply of Palladium. A crisis involving confrontation or escalating tension between USA and Russia will have a major impact on PGM and on Palladium in particular. For my own reference I checked what happened in the PGMs market during WWII going through the USGS Minerals Yearbook for the years from 1940 to 1945 ( Platinum and Allied Metals section of H.W. Davis): during the war period PGMs refined imported and consumed in the USA increased more than in any other previous year stimulated by defence activities in the chemical and electrical industries. Supplies of PGMs in 1944 were not adequate to permit their use for non essential purposes, the deficiency was met by larger imports (mainly from Canada and Russia) and by the release of the US government stocks. Note that US stocks of PGM in 1943-44 were 323K ounces or 75% of the annual US consumption at that time (annual uses of PGM in the USA in 1944: 450K ounces). Various trading limitation for PGMs were adopted by the US government such: Conservation Order M-95 effective March 11, 1942: Rhodium use for jewellery prohibited, Conservation Order M-162 effective effective May 30,1942: Platinum traffic outside approved trade channels suspended, Conservation Order L-45 April 15, 1943 restriction for Palladium and Gold use in the jewellery sector. What saved the USA during WWII from running out of PGMs were the adequate level of stocks and the imports from producing countries like Russia and Canada. Today things are really different: the USA net import reliance of PGMs as percentage of apparent consumption is 91% for Platinum 91% and 82% for Palladium. Last year Russia accounted for more than 50% of all Palladium imports in the USA (including Palladium sales from UK and Germany originated from Russian metal). The US National Defense stockpile of uncommitted inventory is less than 10,000 ounces of Platinum and zero (yes: zero) of Palladium as of 9-30-07 (USGS mineral commodity Summaries for PGM 2008). No wonder recently the US Defense National Stockpile Centre announced a suspension of Platinum sales (August 7, 2008) (Palladium sales did not need to be suspended because the Defense National Stockpile is already empty…..). In the event of escalating tensions with Russia the USA can suddenly loose its most important source of import of PGMs and being left without stockpiles it will experience in a dramatic supply disruption shock, a situation much worse than it was during WWII when the USA had adequate PGM inventories and when the USA were technically fighting alongside Russia (major PGM producer) against the Nazis . recently Investors have been focusing on slowing car sales in the Western world liquidating their PGMs holdings: recent COT data show that large speculators and retailers keep reducing their holdings while commercials keep buying at levels previously seen only in the occasion of major bottoms. I believe that focusing on car sales and slowing demand for PGMs in the western world during these troubled and very dangerous times is really a very short-sighted investing strategy: investors should rather hoard PGMs and, if anything, not sell them and keep them tight.

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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