Palladium Soars on Russian-Export Worries

(March 21, 2014 - by Ira Iosebashvili, Wall Street Journal)

Palladium prices jumped to their highest level in 2½ years on fears that top exporter Russia would retaliate against U.S. sanctions by cutting exports of the precious metal.

Palladium for June delivery, the most actively traded contract, gained $17.65, or 2.3%, on the New York Mercantile Exchange, to $789.30 a troy ounce. That was the highest close since September 2011. During Friday’s session, palladium rose as high as $800.

President Barack Obama ordered a second round of sanctions Thursday against Russian officials and a bank, raising the stakes in the confrontation over Russia’s annexation of Ukraine’s Crimea region. Investors fear that Russia may strike back by reducing exports of some of its commodities. Russia is the world’s biggest supplier of palladium, a key component of exhaust filters that keep cars running cleanly.

The sanctions come at a particularly nervous time for the palladium market. Miners in South Africa, the world’s second-largest supplier of palladium, have been striking for eight weeks. Meanwhile, two of South Africa’s biggest banks, Standard Bank Group and Absa Capital, said they each would list palladium exchange-traded funds in the coming week, potentially boosting investor demand for the metal. A platinum ETF launched in South Africa last year drew large amounts of that metal into its vaults, further tightening global supplies.

"They’re launching an ETF on palladium when there are serious questions about the two largest suppliers of the world’s palladium," said Peter Hug, global trading director at Kitco Metals. "It just looks like the market is getting squeezed in a very big way."

The palladium futures market is small relative to other commodities such as gold, with outstanding contracts valued at $3.3 billion. Russia supplies 42% of the world’s palladium and South Africa supplies 37%.

Russia has for years held sway over the global palladium market, due to a combination of government sales and robust mine output. The country had amassed a large hoard of palladium during the Soviet era, which it has gradually sold off. Russian officials have maintained that stockpile levels are a state secret. Some analysts, however, believe that Russia’s stockpiles are dwindling.

With stocks of Russian palladium already low, an interruption of exports probably wouldn’t upend markets, said KC Chang, senior economist at IHS, a global consulting firm. "Economic sanctions on Russia are unlikely to have much impact, as supplies were already stretched to begin with," Mr. Chang said.

Still, market participants remain nervous.

Although an interruption of palladium exports is unlikely, "it is still in the back of everybody’s mind," said a manager at a precious-metals trading firm. " Putin has certainly proved he’s a wild card," he said, referring to Russian President Vladimir Putin.