One of the old Russian toast wishes everyone more pies and buns, fewer blackeyes and bruises. It seemed the exporters of platinum group metals were following the toast’s advice, until last week’s announcement from Ford Motor Company.
The new U.S. accounting rules obliged the auto giant to disclose the value of palladium it acquired last year at a price of $1,500 per ounce. Industry analysts believe Ford bought at least 1.9 million ounces from Engelhard, paying $400 more per ounce than the highest price of $1,100 palladium reached last February.
Palladium is a precious metal used mostly in the manufacture of catalytic converters; these are required in cars to control their gas emissions. Keeping a stock is normal for companies that manufacture cars. Paying Ford’s price seems to have come from the clever salesmanship of Engelhard, combined with the foolishness of Ford’s purchasers, when both were driven by speculation that Russia, the world’s primary supplier of the metal, was withholding exports in order to drive the price higher.
Now, with Ford’s disclosure, the tables are turned. Ford’s stockpile is so large, it represents 41 percent of total Russian sales of palladium last year; 38 percent of U.S. imports of the metal in a good year. It is larger than annual sales out of Russia’s own stockpile of palladium. If Ford hangs on to every ounce, until it can be used in the production line, U.S. demand for imports this year will fall substantially. If Ford sells, then it will be competing against Russian sales. Either way, it looks like the price of palladium will slide – unless, of course, someone offers Ford a price it can’t refuse, and decides to hold the stockpile for another price peak. That may be dreaming.
Right now in Moscow the problem on hand is who should pay the price of palladium’s fall. This pits Norilsk Nickel, the producer of about 3 million ounces per year, against the state, with a stockpile of about 10 million oz., and an annual sales rate of between 1 million and 2 million ounces.
According to Maxim Finsky, Norilsk Nickel’s sales director, the company should sell all of the palladium it produces this year, but Russia should supply less than the 4.6 million ounces exported in 2001. In other words, the state should sell almost no palladium. Ford’s mistake should become the Kremlin’s sacrifice.
Finsky said Norilsk Nickel is negotiating “a price corridor” with regular buyers in Japan and the United States, and is hoping to neutralize the impact of spot-market speculation on palladium’s price volatility.
“We are orienting ourselves towards the increase of longer-term contracts with end-users of metal,” he said, “Both the producers and the consumers of palladium are interested in the establishment of a certain price corridor, when the bottom and the top are defined. Japanese consumers announced recently that they think $410 is a fair price, so this gives us an idea about the bottom of the price corridor at about $400.”
Yury Kotlyar, who oversees precious metals strategy at Norilsk Nickel, described the price Ford paid as a “mistake.” But he predicts that Ford will not sell palladium this year. “I don’t think large companies are interested in the destabilization of the market,” he said.
Others believe Ford will sell because it is short of cash.
A European trader says he has detected borrowing of palladium in the market, “which may well indicate that future sales are on the cards. All of this leaves the Russians with a big problem. Sell now? Wait? Try to force the market up and then sell?” There can be no doubt that as the Russian decision-makers wrestle with the answers to these questions, the consensus they seemed to have achieved on the terms for sharing out the proceeds of this year’s export quotas may be breaking up.
“We expect that this year the supply of palladium to the world market will be lower than last year,” Finsky said. “At the same time, if certain guarantees are provided for supplies of palladium from Russia, this will have a stabilizing effect on the market. It is very important that there is no speculative drive from the producers, especially Norilsk Nickel, which supplies half of palladium to the market. I think that our sales this year will not be lower than last year and we will use up our quota for palladium.”
According to Finsky, instead of splitting contract and spot-market sales in half, as last year, “we will only sell on the spot market what’s left over after the signing of longer contracts. We aim at increasing the share of one-year and longer contracts.”
By the second half of the year, Finsky said he believes the current recession will be nearing an end, and “we may see positive trends [in industrial demand] in both Europe and the United States.” More demand should mean more auto production, and more need for palladium.
Norilsk Nickel’s supply of palladium to the market has been supplemented by state stockpile sales in the past. In the late 1990s, for every ounce of palladium exported by Norilsk Nickel, the state stockpile contributed another ounce.
However, in 2000 Valery Rudakov, the deputy finance minister in charge of precious metals policy, proposed the Central Bank gives up its control over its stockpile of palladium. He contracted to ship some of the palladium to German banks as collateral for loans, with the option of either redeeming the loans or allowing the banks to sell the metal.
Last year, there was a reduction in the release of stockpiled palladium, and the Kremlin began building up a stockpile of its own in Zurich.
The Ford disclosure could force the Kremlin to pay a very large sum of money to redeem the metal in German bank vaults and expand the Zurich stockpile so that the palladium doesn’t hit the market.
But why, the Kremlin and Rudakov say to themselves, should they pay out of the state pocket in order to keep the money flowing to Vladimir Potanin, the owner of Norilsk Nickel? Potanin has already been quietly taxed as much as a billion dollars in the past two years in order to protect his property. He has been obliged to buy the state grain company, and invest in bread production. Because of Ford, Rudakov is telling the Kremlin, Potanin doesn’t deserve to get all the pies and buns, leaving the state with all the bruises.
This kind of talk has upset Russian calculations over how much palladium should be exported during the year. It has reopened the longstanding rivalry between Norilsk Nickel and the state stockpile agency Gokhran, which Rudakov heads, over who should benefit from the annual export quota.
When former President Boris Yeltsin was at the Kremplin and Anatoly Chubais controlled the treasury, Potanin got a 10-year quota from the state to export all the palladium he could. Two months ago, Rudakov said he was willing to give him a 5-year quota to export platinum and rhodium. Today Rudakov’s deal with Potanin is unraveling. Not only is the government delaying the authorization of the platinum and rhodium export quota, it is also reviewing the terms of the palladium quota too.
Finsky said he believes the prospect of Norilsk Nickel losing the palladium quota “is not real.” But “in principle anything can happen,” he conceded.