Opportunity for SA palladium — if industry gets support

First Published in Business Day on   October 17th, 2024   |   by   Gracelin Baskaran

Opportunity for SA palladium — if industry gets support
REUTERS/MICHAEL DALDER

Key metal is in high demand, and major producer Russia is likely to remain a pariah


Palladium, one of the six platinum group metals (PGMs) — has long been a vital part of the automotive economy given its use in emissions control systems. However, in a world with rising trade tensions — including back-and-forth trade restrictions imposed by countries such as China, Russia, Canada and the US — SA’s palladium is likely to be highly sought after in future for its use in semiconductors. 


Semiconductors, often called chips, are the foundation of modern electronics, including smartphones, computers and televisions. As technology progresses and chips become more compact, the risk of oxidation and degradation increases. Palladium’s strength and resistance to corrosion and oxidation make it an essential protective layer for chips, ensuring their long-term functionality.


But global security of palladium supplies is precarious. In 2022 the Biden administration issued warnings to the chip manufacturing industry that it needed to diversify its supply chain in case Russia cut off US and other advanced economies’ access to key minerals and materials. 


The US produces only 5% of global palladium through its two operations in Montana, both owned by SA’s Sibanye-Stillwater. Its domestic output accounts for a mere 16% of the nation’s consumption, leaving the US highly dependent on imports. 


Russia holds the world’s largest palladium reserves and produces more than 40% of global palladium supply from just two top-performing projects. In 2021 the US imported 35% of its palladium from Russia.


The common sense solution would seem to be to increase US production. But the economics of palladium make reducing supply chain vulnerabilities difficult. The total cash cost for mining one ounce of palladium in Mogalakwena, Limpopo, is $590, compared with just $402 at Norilsk in Russia.


With palladium prices down to just $923/oz, Russian palladium mining operations generate a 56% greater profit margin than Anglo American’s project in SA.


However, the SA mining operations are more economical than those in the US. The Sibanye-Stillwater palladium mine in Montana faces 2024 operating costs of $1,032/oz — considerably higher than the current selling price of palladium.


Last month Sibanye-Stillwater announced that it intended to lay off about 700 employees in Montana as part of a restructuring effort, triggered by a large drop in palladium prices due to Russian imports and losses exceeding $350m in the state since the beginning of 2023. 


The economics of hard commodities is marked by market manipulation, import-export restrictions and lags in aligning supply and demand. So despite a market in which palladium prices are declining and we see significant precarity in supply chain security, the World Platinum Investment Council predicts a 1.28-million ounce palladium deficit this year, equivalent to more than a third of Russia’s total production in 2022.


These deficits are largely the result of supply issues as mine producers restructure in response to a period of suppressed prices. It is unlikely that Russia will return from its global pariah status within the next decade and this opens up an important opportunity for SA, which holds the world’s second-largest reserves of palladium. It contributes 34% of the world’s production. 


SA is the most cost competitive counter to Russia. Its largest PGM operation, Mogalakwena, produces 6% of the world’s palladium. As a whole, the mining industry faces several challenges in SA, including rising production costs, energy and transport infrastructure failures, lack of permitting, labour disputes and declining ore grades.


Despite the forecast supply deficit, without government incentives SA remains an unattractive option for Western private sector investment because of the aforementioned risks. 


Share article