Pass-the-Parcel – Russian Style
For the past five years we have closely followed imports and exports into and out of Switzerland, the clearing centre for palladium and platinum. If imports exceed exports, we believe that would imply that stocks of unused metal are increasing – and vice versa. Russia, the largest producer and holder of palladium stocks, did not ship large quantities of palladium to Switzerland in December 2005, as we had expected. Instead, shipments to the US hit a record monthly high in December and this, together with a large shipment to Switzerland in January, indicates an acceleration of Russian palladium shipments. Russian palladium shipments are the key factor in the supply and demand balance for palladium, and this acceleration makes palladium’s rally tenuous.
For some years we have followed Swiss import and export data to judge whether the palladium market is building or reducing stocks. Switzerland, specifically Zurich, is the clearing centre for palladium and platinum and tends to be the repository for metal that has no immediate use, whether on behalf of funds, producers or end-users. Over the past few years we have noted erratic shipments from Russia that have seen implied stock balances increase sharply, often at the end of the year. Norilsk, Russia’s only producer, is the largest miner of palladium and, moreover, the Russian state is believed to have extensive stocks built up over the past decades, held either at the Finance Ministry or by the Central Bank of Russia. As palladium rallied in late 2005, we repeatedly heard talk that Russian sales of palladium had slowed or even halted entirely, and this speculation was largely responsible, we believe, for driving the palladium price higher.
Palladium has traded in a very volatile manner over the past decade. Long a $100- 150/ oz metal, erratic supplies and rapid demand growth from the auto sector – largely but not entirely from US car producers – drove the palladium price to nearly $1100/ oz in early 2001. But a resumption of Russian exports and aggressive substitution by end- users saw the palladium price lose nearly 90% of its peak value by early 2003 (Chart 1).
Palladium has attempted to recover some of these losses – firstly in 2004, when it briefly traded close to $350 /oz and then, more sustainably, from the third quarter of 2005, and it is currently trading between $300-320/ oz. Supply and demand fundamentals for palladium have certainly improved somewhat over the past few years as surging Chinese jewellery demand has returned the market to a primary deficit (here narrowly defined as after recycling but before Russian stock sales).
Simply put, if Russia does not sell from stockpiles, palladium would start to work off ex-Russia stocks, which could be a trigger for prices to rise.
In early February, following the release of December 2005 Swiss customs statistics, the absence of substantial imports from Russia led us to conclude that Russian sales had indeed slowed, although this enthusiasm was tempered after 18 tonnes of palladium shipments from Russia to Switzerland were seen in January 2006.
Plotting the Ebb and Flow
Due to the increased importance of Russian stock sales, we have conducted a more rigorous examination of Russian shipments into Switzerland. Based on this work, it is apparent that Russian shipments have remained steady over the past few years – at about 30 tons on a rolling 12-month basis, as shown in Chart 2. Both the lack of shipments in December 2005 and the subsequent pick-up in January 2006 are clear from this chart.
But two clients pointed out to us that we should not confine our examinations of shipment data to Switzerland but should look at the US data as well. After all – according to Johnson Matthey’s data of end-use of palladium, North America is the largest user of palladium, accounting for 25% of global demand in 2005E.
Chart 3, US imports of palladium from Russia, clearly shows that US imports of palladium from Russia slowed after early 2001 – entirely logical, considering the fall in demand from the auto catalyst industry at the same time. But note the spike in December 2005: if Russia did not ship palladium to Switzerland, it certainly made up for it by shipping a record quantity to the US in December.
We have combined the shipments from Russia to Switzerland and the US on Chart 4. This chart shows rolling 12-month shipments to both countries from December 1999.To make the comparison fair, we have shown the rolling 12m-month average palladium price as well.
In January, only 1.25 tonnes of palladium were imported by the US from Russia but, combined with the very strong January import numbers from Switzerland, this progressive shipment rises to 93 tonnes – i.e., the total imported by both Switzerland and the US from Russia represented an increase of 43% 12m/12m.
As an interesting aside, US imports of palladium continued at a high rate in January in spite of relatively low imports from Russia. At 13.3 tonnes, US imports of palladium in January 2006 were higher than in any month in 2005, except for the surge in December discussed above. And only once in the 24 months between January 2003 and December 2004 was this total exceeded, when 13.4 tonnes were imported in March 2004.
The source of January 2006 imports contained an interesting element – a quantity of8.3 tonnes from Luxembourg. This is the first time in our records – which date back to 1996 – that the US has imported metal from Luxembourg, and fits with growing Swiss/Luxembourg trade over the past year or so.
It seems clear that there has been no slowdown in Russian shipments of palladium into the US and Switzerland. And while it is impossible to be certain about Russian stockpile sales, in the 12 months to January 2006, Russian shipments to these two markets totalled 95 tonnes, or just about 3 million ounces. This is roughly Norilsk’s annual production, indicating that any Russian sales into other markets would have implied stock sales.
Although we have no comprehensive list of Russian exports, we note regular Russian metal imported by Japan, another popular destination for palladium. Also, Norilsk has publicly stated that they sell a large quantity of metal to clients directly; this probably means shipments into the European Union and other Asian countries.