Russia's impending war with Ukraine is stoking major palladium supply fears

For each Russian tank that lines up on the Ukraine border, the price of one precious metal starts to climb.

Satellite images show Russia is moving more troops to border points in Russian-controlled bases in Belarus and Crimea, as well as blood supplies, a sign it could be preparing for casualties.

As 100,000 Russian troops amass on the border of the former Soviet state, the hovering threat of sanctions from NATO members led by the USA have sent prices of palladium skyrocketing.

One of six metals known as platinum group elements, palladium is a critical metal primarily used in catalytic converters, the part of a car used to control and reduce emissions.

Russia produces a lot of palladium, equivalent to around 38% of the market.

Most of it is produced by State-owned Norislk Nickel, also the world’s largest producer of nickel sulphides and a company expected to face sanctions if Vladimir Putin’s Russia continues its aggressive stance on the Ukraine border.

Those fears have seen prices rally 29% since the start of the year to a high of US$2454/oz, Metals Focus says, the first time prices have risen above US$2300/oz since September.

That is an astonishing 59% up from post-pandemic lows of US$1542/oz in mid-December.

Palladium prices have been rising sharply since the turn of the year. Pic: ANZ Research

Russian fears power price run

Palladium was the beneficiary of a short-lived run to a record high of US$3019/oz on the expectation of rising motor vehicle demand which dissipated as a global semiconductor chip shortage stalled the post-pandemic recovery in the auto industry.

According to Metals Focus, the late year collapse was impacted by three major factors, hawkish fed announcements that hammered precious metals across the board, Omicron lockdowns and a fire sale from mining companies looking to clear year end inventories.

But the recent upside is all down to fears about Russian supply in the event of a war with Ukraine.

“In the context of the palladium market, Metals Focus estimates that Russia will account for approximately 38% of total global primary supply this year, so any disruption to supply from this region could comfortably erode the small physical surplus currently expected in 2022,” they said.

“Forearmed with this knowledge, we saw a pronounced reaction by the market last week.”

That has also seen shorters exit their positions. Nymex positions had spent a record four months net short at 274,000oz on January 18 before the price run began.

130,000oz of short-covering has taken place now over the last week, helping drive prices north.

People are also looking to get their hands on the metal today in the expectation of future price rises, with the forward rate moving from contango to backwardation.

That means investors will pay more to have their hands on the metal right now, in the expectation supply disruptions will make it more scarce down the line.

Seen this one before

It is not the first time this sort of thing has occurred. Cast your mind back to the Russo-Ukrainian War a few years ago when Russia annexed Crimea.

“At the start of 2014, when the Russo-Ukrainian War initially started, the palladium price seemingly reacted in a very similar way,” said Metals Focus.

“In keeping with today, there were fears of palladium export sanctions and potentially other supply disruptions.

“However, neither of these scenarios emerged as the response from the West instead took the form of personal visa bans and asset freezes.”

Price correction likely, but long term outlook positive

Are prices set for a long-term run in 2022?

Fundamentals and supply chain challenges could eat into the gains, according to Metals Focus.

On technical indicators the market is starting to look “overbought”.

“This may take some of the immediate wind out of palladium’s sails, giving the market time to reassess the severity of supply fears. At the time of writing, the metal has eased back 2%, from its end-January high, and is trading at around $2,400,” they said.

“In the very near-term, as supply chain challenges continue to weigh on auto production, a price correction seems likely from this recent sentiment-lead high.”

But easing supply chain disruptions and recovering auto production could spell even higher prices by the end of the year.

“This in turn should provide renewed impetus to the palladium price, with the potential to establish new highs for the year,” according to Metals Focus.

ANZ, which has already seen its March quarter price forecast of US$1900/oz obliterated, expects palladium to trade at US$2350/oz by year’s end.

Australian miners hunting PGE glory

Clearly there will be concerns about the dominance of Russia in the palladium supply chain.

Making matters worse the only other producer of significant scale is South Africa, where miners are facing increasing concerns around government corruption, civil unrest and jurisdictional risk.

In fact, strikes in South Africa overall had more to do with palladium’s price run in 2014 than Russian military capers.

“In 2014, a similar 27% rally took the metal months, not days, to reach its $912 peak, at the start of September, before falling off steeply,” Metals Focus said.

“Although, the protracted strike in South Africa added far more weight to the metal’s rally that year. South African production dropped 21% from 2013 to 2014, while Russian supply actually recorded its highest level over the 2012-16 five-year period.”

Australia has no significant PGE producers at the moment, but it has become the focus of one of the most exciting exploration discoveries this century.

Julimar nickel-copper-PGE find sparks Aussie industry

Chalice Mining’s (ASX:CHN) palladium rich Julimar discovery near Perth is the gem in the crown of the emerging Australian platinum group elements industry.

Regarded by PGE expert Keith Goode as the best discovery he’s ever seen, the maiden resource of the Gonneville deposit at Julimar contained 10Moz of palladium-platinum-gold resources along with 530,000t of nickel, 330,000 copper and 53,000t cobalt, reported as a 17Moz palladium equivalent.

Weighted by commodity price and tonnes, palladium is the most valuable component of Chalice’s precious metals resource.

A scoping study, which will give an idea of Gonneville’s commercial scale and how Chalice plans to extract the PGE and nickel-copper resources, is due out by the middle of this year.

Chalice is confident it can grow Julimar beyond the Gonneville resource, which represents just 7% of a 26km long intrusion which hosts the PGE rich mineralisation.

It announced the start of drilling on January 20 at the Hartog target to the north after the State Government granted Chalice approval to drill in the Julimar State Forest.

It is not only Julimar where Chalice and over a dozen Chalice-inspired explorers believe they will find nickel-copper-PGE discoveries.

There are hopes the province on the western margin of the Yilgarn Craton – famed for its gold and nickel bounties around Kalgoorlie to the east – could host nickel-copper-PGE resources along a mineral belt stretching hundreds of kilometres.

Last month Venture Minerals (ASX:VMS) said an EM survey run by its farm-in partner Chalice at the Thor prospect, some 300km southwest of Julimar, returned multiple targets at the “Julimar lookalike”.

A maiden drill program by Venture before the Julimar discovery was made in 2018 intersected 2.4m of massive sulphide averaging 0.5% copper, 0.05% nickel, 0.04% cobalt and anomalous gold and palladium.

Away from Australian shores the largest standalone PGE producer listed on the ASX is Zimplats (ASX:ZIM), the Zimbabwean based subsidiary of South African PGE giant Impala Platinum.

Zimplats, 87% owned by Impala, runs the Ngezi operations near the Zimbabwean capital of Harare on the Hartley Geological Complex, a rich domain which hosts 80% of the southern African country’s PGE resources.

Zimplats produced 140,768oz of 6E (platinum, palladium, gold, rhodium, iridium and ruthenium) in the December quarter, including 64,396oz of platinum and 54,742oz of palladium.

The $2.6 billion company’s shares are up ~4% year to date and 106.90% over the past 12 months.