Palladium shortfall puts Russia on poll

After dealing itself out of the market in the early 2000s, Russia may take advantage of a resurgent palladium price.

IT’S not often that you get a lesson in customer service and an investment tip at the same time from the mining industry, a place where customer and shareholder relations are not highly rated.

But if you consider the case of platinum and palladium, two relatively obscure metals for most Australians, there is a good example of how failing to think about the requirements of customers can make a complete mess of a business.

Both metals, which have similar chemical properties, are used in vehicle engines worldwide thanks to their ability to capture noxious gases such as nitrous oxide. Platinum works best in the exhaust of diesel engines, while palladium is best in petrol engines; and both can even be mixed with gold or rhodium as they are all from the precious metals family.

Due to their essential role in lowering pollution levels from vehicle exhausts, every carmaker in the world is a major buyer of platinum and/or palladium (as both can do the job).

It is when it comes to choosing a metal that the customer-relations issue becomes interesting, because South Africa dominates the supply of platinum and Russia dominates the supply of palladium; and neither country has a well-developed understanding of how global markets work because both have suffered their own form of self-imposed isolation.

To test that statement, consider how the prices of platinum and palladium have moved since 1999, as far back as it is possible to go in checking records without diving into the archives.

In January 1999 platinum was priced at around $US362 an ounce, palladium at $US337/oz. Two years later, platinum had risen to $US619/oz, while palladium had rocketed up to $US954/oz.

What drove palladium up so sharply was a Russian export embargo designed to squeeze the market and screw the customers – a dopey idea at any time because customers will invariably look for alternative suppliers or substitute material, which they did by switching to South African platinum.

The carmaker switch resulted in a crash in the price of Russian palladium by 80 per cent over the four years to 2004. Platinum, naturally, went the other way, rising by 50 per cent.

A reverse situation is happening today, with South Africa becoming the unreliable supplier thanks to industrial relations problems and inefficient mining practices that have forced mines to close; and while the price of platinum has not crashed, yet, it is sliding relative to palladium.

Since hitting a rock bottom price of $US184/oz in 2004, palladium has risen by 309 per cent to $US754/oz. Over the same time, platinum has risen by 96 per cent.

The first lesson from the saga of palladium and platinum is that no supplier of any material should ever assume they can squeeze a market without customers finding alternatives – either different suppliers or substitute material.

The second lesson, and the investment tip, is that palladium is on the way back because it is best in the auto-catalysts of petrol engines, a huge Russian stockpile has shrunk and South Africa’s troubles show no sign of fading soon.

Commodity analysts have been dusting off their palladium research with firms such as the Swiss fund manager, Tiberius Asset Management, noting that only a handful of minerals face a long-term supply deficit; palladium tops a list that also includes tin, lead and platinum.

London-based commodities research firm, CRU, also has palladium at the top of its preferred minerals list, followed by tin, zinc and uranium.

Johnson Matthey, a specialist precious metals refiner, believes the once-massive Russian stockpile of 1 million ounces has been cut to 100,000oz.

For WA’s one-time leader in the palladium/platinum industry, Platinum Australia, the price recovery and threatened global shortfall has come too late, because the company was placed in administration last year.

However, the changing markets could help the next owner of PLA’s Panton project in the Kimberley with the company’s administrator, Bryan Hughes, from the specialist insolvency firm Pitcher Partners confident he is close to finalising the sale of PLA to London-listed, South African-focused Jubilee Platinum.

With a handy resource of 14.3 million tonnes of Platinum Group Metals (PGM is a term for the full cocktail, including high levels of palladium) assaying 5.2 grams a tonne, Panton has the potential to produce 90,000oz of PGMs.

The problem for Panton has been the combination of the low palladium price (not any more) and high Australian dollar (perhaps not for much longer).

What will be interesting, however, is whether Jubilee wants PLA only for its South African assets, whether it will see a way to develop Panton, or quickly on-sell it a local company with PGM ambitions.

Answers to those questions, and the next stage in the on/off life of the Panton project, might not be far away.

Don’t quote me

COLD comfort it might be for Australian investors stung by soaring project development costs and delays that stretch into years, but it seems the problem is global.

In Brazil, the budget at an iron ore mine owned by London-listed Anglo American has ballooned from $US3.5 billion to $US8.8bn and the start-up date blown out by two years to 2014.

If that doesn’t catch your eye, then shift focus to Berlin, where even the super-efficient Germans are struggling to complete major projects on time and on budget.

Construction of the new Berlin/Brandenburg airport is running two years behind schedule and a major new railway station in Stuttgart is in danger of being abandoned after the budget on the project rose from $US7bn to $US$9bn without a sod being turned.

There is, obviously, a serious question to ask of the construction industry about what’s gone wrong with its ability to quote correctly, stick to that quote, and complete a project on time.

And there is a secondary, slightly amusing question to ask about what’s going on in Germany, a country which would be appalled to think that it can’t build a train station on time.

Not so sweet

A FINAL word on Europe ... cocoa prices have crashed to a six-month low because chocolate sales in Europe are melting, perhaps the best measurement yet of just how severe the recession is over there.

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‘‘College is a place where pebbles are polished, and diamonds dimmed.’’
Robert G Ingersoll