Approximately half the world’s palladium was produced by Russia’s Norilsk, and Russian industry had fallen into disarray following the collapse of the USSR’s centrally planned economy in 1991. Metals previously controlled by the state were being sold into western markets, most noticeably aluminium which flooded the West from 1991-1994, forcing stocks up and prices down with the situation rescued by a 1994 “MoU” restricting Russian exports and global production.
During the 1990s, state owned shares in Russian industries were distributed amongst the workforce who sold these on cheaply. Followed by the government backed “shares for loans schemes”, the ownership and control of Russian commodity companies ended up in the hands of savvy businessmen.
In the early 1990s, Norilsk were satisfying global palladium demand through sales from large strategic stockpiles but, around 1997, these export sales began to dry up often due to export licences not being granted. Around the same time, a US based hedge fund with a keen eye for market fundamentals recognised an investment opportunity. The combination of automotive demand, restricted Russian sales and US fund investment saw palladium rise from $120/oz in 1996 to exceed $1000/oz by 2001.
Chart 2: Palladium
In the late 1990s, US car companies were especially active in metals hedging, with GM and Ford hedging aluminium out 10 years forward when the LME market extended just 27months. These hedges had performed very well in a rising market, and GM had also entered into a 10 year, multi billion US$ physical aluminium supply agreement with Alcan in 1998.
In 2001, with palladium prices around $1000/oz, Ford took an opportunity to lock in a significant stockpile via an investment bank. By late 2001, palladium prices were crashing lower and Ford took a $1bn markdown on their palladium position by end of that year, with Ford’s trader departing the firm in early 2002 (and the bank’s salesman leaving in 2003).
Coming back to now, car companies have been making efforts to secure physical cobalt supply and price protection. According to press reports, VW made an unsuccessful attempt to lock in significant cobalt hedges last year at well below market prices, with their approach rejected by producers who think cobalt has significant upside potential.
If palladium’s x8 rally between 1996-2001 is any guide to cobalt’s price potential, cobalt could have a long way to run from its $25k/Mt base in 2016. For car manufacturers, caught between government legislation, increased demand and a restricted and volatile supply situation in the DRC, cobalt pricing should prove an ongoing challenge. It will be interesting to see if any car companies take a significant position, and what the pricing aftermath will be.
Source: Bloomberg
Rohan Ziegelaar E:
metals.desk@
admisi.com T: +44(0) 20 7716 8081
15 | ADMISI - The Ghost In The Machine | May/June 2018
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