Palladium will see some volatility over the next few months, but it will likely bounce back at the end of the year.
This article published with permission from InvestmentU.com.
Ah, winter time in South Africa. The days are sunny and warm. The nights devilishly cold, near freezing. But more importantly, if it’s winter in South Africa, that can only mean one thing. It’s the annual “coming apart at the seams.”
That’s right; the 2011 strike season is in full swing!
Early July in the United States is full of picnics, baseball games, fireworks, hot dogs, hamburgers, beer and trips to the beach. In South Africa, winter means the annual shortages of nearly every necessity and anything produced from union workers.
And for precious metals investors, it’s always a situation worth watching.
South Africa’s taking it to the streets
July in South Africa began with gas stations running out of gas. Propane tanks needed for heating and cooking sat empty. And 70,000 chemical and fuel workers took to the streets.
This was on the back of the 170,000 steel and engineering industry workers who walked out two weeks early, demanding higher wages.
And as those shortages trickle down — plaguing mining output — it’s the miners’ turn at the plate. A total of 200,000 coal, gold and diamond miners are insisting on a bigger piece of the pie, which will carve into production.
With severe supply shortages, any investor in metals should be paying more attention for the real way to profit.
Gold isn’t the top dog in precious metals
First off, everyone continues to talk about gold. It’s hitting new records and, with the debt crisis that’s been looming over the United States for months, it’s rallied as a safe haven.
But gold isn’t the top dog in precious metals increases. Palladium and silver share that spot. Since June 29, palladium is up 12.7% (silver is up 14.7%). After hitting a low to start July, gold is up 9.1% and platinum has increased 5.3%.
Last week, palladium hit a peak of $845, its highest since February. And just think, last year at this time, palladium was at $469 per ounce.
So, concerns about the South African strikes impacting mine production put some upward pressure on a lot of precious metals prices. It’s important to note that South Africa is one of the largest palladium producers on the planet.
Now, the strikes in South Africa are seasonal. It’s like the changing of leaves or the first snowfall … but louder and more violent.
Unfortunately, the annual walkouts do highlight a problem for South African miners —
they’re too expensive. They make six times that of Chinese miners and produce less.
And in a country where unemployment is a staggering 25%, this year’s possible record number of walkouts could have even more serious ramifications.
The Russian Stockpile Enigma
A couple of months ago, I talked about the world’s largest palladium producer, Norilsk Nickel (PINK: NILSY), mentioning that Russia’s historic stockpiles of palladium were drying up and will likely be exhausted completely.
In the interim, Norilsk was chided for speaking too soon as Russia’s Gokhran State Repository stepped forward and stated that stockpiles will last throughout 2011 and into 2012. Now, beyond that, the officials from Gokhran simply said, “We’ll see.”
This sent the price of palladium on a roller coaster ride from the beginning of May to July.
I also mentioned that palladium’s chief uses are for cell phones, iPods and catalytic converters for cars.
Where the price of palladium is heading
So, here’s where we look at some recent earnings reports from other companies to get an idea where palladium is heading.
(NYSE: F) reported its business is heating up —
increasing $4.2 billion year-over-year to $35.5 billion. Every automotive segment reported an increase as vehicle sales pushed 101,000 units higher to 1.5 million.
Ford Motor Company
The U.S. car market hit a dismal low of 9.5 million units sold in 2009. But obviously the turnaround is in full swing. And sales are expected to increase to over 13 million units this year, then rise to over 15 million by 2015.
Globally, automotive sales are projected to top 74 million this year, with emerging markets accounting for the majority of the demand.
Then we saw Apple’s (Nasdaq: AAPL) iPhone sales increase 142% and its iPad sales shoot up 183%. Mobile device sales on a global scale are rising at a blistering pace. Last year, sales for this sector increased 31.8% to 1.6 billion units. In just the first quarter of 2011, mobile device sales were up 19% to 428 million.
Of course, China is the dominating factor in both of these segments. In June, auto sales in China increased 10.9%. By 2020, China will represent more than a quarter of the world’s automotive market, purchasing 32 million vehicles.
For Apple, it’s hasn’t even scratched the surface of the Chinese market … and its iPhone sales skyrocketed 250%. At the moment, China has 900 million mobile phone users. Though the totals are minute, each cell phone holds 0.015 grams of palladium.
Do the math: that’s more than $11 billion of palladium in the phones of Chinese consumers alone.
In 2010, we were at a palladium supply deficit of at least 490,000 ounces. Without the exports from Russian stockpiles, the deficit was more likely over a million ounces.
So, I continue to have a bullish stance on palladium. It will undoubtedly see some volatility. We could see a sell-off in the third quarter as the market cools off from a summer overheating. But it should bounce back in the final stretch of the year, averaging near $880 per ounce.
The best ways to play palladium are going to be southern African miners and exchange-traded funds (ETFs). Even Norilsk is worth a look as it’s the world’s largest palladium producer. The company’s palladium output from its African operations increased 26% in the second quarter. And its Arctic divisions continue to produce the vast majority of Norilsk’s share of the white metal.
Matthew Carr is a contributor at InvestmentU.com.