Palladium is a rare earth metal that is becoming rarer by the day. It is also an essential component in most computers. The demand for computers is growing, and the disposable nature of computers is becoming all the more prevalent in business models.
Palladium is mined primarily from Russia, where roughly 44% of the world's supply is found, and South Africa, which holds 40%. In Russia there is one primary mine, a state-owned rare gems exchange that handles trading and the Russian Central bank that control the extraction and sale of Palladium. Russian reserves peaked in the 1980's. In the 90's production began to show signs of faltering. It is rumored that the once vast supply is all but exhausted. The third largest producer is North America. Only two companies are mining palladium, and there is potential for further development if investors can be secured.
Russia's unknown reserve
Norilsk Nickel is the only Russian mining company that extracts the ore and works with the state-owned Almazyuvelirexport, which holds a monopoly on exports. Norilsk has a globally diverse portfolio with investments in South Africa and Australia.
Russia is looking to draw down its stocks of palladium over the next three years. "If that is true, we're in a situation where we will have full transparency in the palladium market for once and that will result in a more favorable price discovery for palladium," says Will Rhind, Managing Director of ETF Securities in New York.
The demand is growing and the use of palladium has become an essential component in every car and smartphone. But, no one really knows the size of the reserves of this commodity. The solution to growing demand has been met with recycling efforts, which have created some relief and a sizable offering from the Gokran, the Russian State Reserve. In 2011 the Gokran supplied "750,000 ounces out of its own stockpile" to meet the global demand. The problem for watchers of this commodity is that no one really knows how big the Gokran stockpile is. This X-factor has created a global discount in palladium pricing.
The long game
In early 2000's Ford and General Motors (NYSE:GM) tried to lock in palladium prices, as they predicted a large Russian sale. In the end, Russia did not sell and Ford had to write off nearly $1 billion. In time Russia did sell, and the prices have steadily declined from a high of $1,100 per troy ounce. Ford and GM's moves are understandable since palladium is essential in the construction of catalytic converters.
The secrecy around the Russian palladium market leaves little room for commodity traders to forecast pricing schemes. This market is a good example of a state-controlled commodity that is not responding to market demands. What is known is that Palladium is an essential component in many of the machines the world has come to rely upon. What is not known is how much is left and how much it will cost.
Uncertain times ahead for Norilsk
Last October, Norilsk hired Barclays to sell the majority of its international holdings. This sale is following a trend within the nickel sector of consolidation in the wake of lower nickel prices. As Norilsk is the largest supplier of palladium, this move adds to the already present uncertainty around the palladium market.
North American developments
The erratic Russian palladium market has caused two things to happen. First the market is booming as the demand is almost never fully met, and the demand is based on the critical use of the mineral for technological components. Second, other sources of palladium are being sought especially in North America. Canada's North American Palladium (NASDAQOTH:PALDF) and the U.S.'s Stillwater Mining (NYSE:SWC) are the only companies developing palladium ventures in North America.
Palladium and investors
Investors in palladium will also have to deal with market fluctuations in other precious and rare earth metals. Due to palladium's scarcity, it is often mined as a byproduct of other metals such as copper, nickel, and gold. Many of the large nickel mining companies are consolidating their assets due to lower commodity prices. This will mean that mines that could have produced palladium face the risk of being shut down. However, Stillwater mining and North American Palladium offer a unique opportunity for investment. North America is the third largest region for palladium mining outside of Russia and South Africa.
Andrew Foote has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.