Norilsk Nickel updates on Palladium - September 5

In H1 2014, palladium was the best performer among precious and most of industrial metals. A 5- month long labour strike in South Africa put a halt to 20% of global palladium production and resulted in over USD 2 billion in lost revenue. We believe that the pre strike mine production capacity could be reached not earlier than September 2014 at best.


The labour strikes affected only mine production, so that the South African PGM producers could still produce refined metal using the ore inventory accumulated ahead of the strike as well as tap into their refined metal inventory. Therefore, the negative impact of the strike on the supply of refined metal was partially mitigated. We expect a reduction of palladium supply from South Africa by over 400,000 ounces this year as ?ompared to 2013.


We estimate that there were no sales of palladium from the Russian government stockpiles (Gokhran) in H1 2014, thus confirming the market view that these stockpiles have by and large depleted by now. Gross palladium demand increased in H1 2014 on the back of expanding global automotive industry driven by strong growth in China and recovery in the developed world, combined with rising investment demand. The new ETFs launched in South Africa (by ABSA and Standard Bank) accumulated in total 850 thousand ounces of palladium in H1 2014.


As result of the apparent market deficit in H1 2014, palladium price increased 7% year on year to USD 779 per ounce.


We expect an increase of gross palladium consumption by around 2% in 2014 to 9.5 million ounces. Rising consumption combined with reduced supply of the primary metal, we forecast should drive the palladium market to a wider deficit in 2014 of over 2 million ounces (over 20% of global gross consumption) up from approximately 1.0 million ounces deficit in 2013.


We also reiterate our view that the discount of palladium to platinum should continue shrinking. The current discount remains to be fundamentally unjustified, in our view, and we see substantial further room for platinum substitution by palladium in diesel autocatalysts as well as the palladium demand growth in gasoline autocatalysts and other applications.




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