Politics & Palladium: Showtime!

- November 2nd, 2009

Political wrangling over the General Motor bailout could well be the silver lining for Stillwater Mining Co. Other automakers continue to use palladium, thereby ensuring higher prices.

By Kishori Krishnan Exclusive To Palladium Investing News

Things have changed for General Motors, but there appears to be a crisis brewing in the political

The $58 billion federal rescue of General Motors has got the US platinum-group metals (PGMs) producer Stillwater Mining, which had lost its sales contract under the GM bankruptcy petition, checking out some silver linings to its many dark clouds.

The company’s PGMs supply agreements with both GM and auto firm Ford had included provisions that guaranteed a minimum purchase price for palladium and platinum, should prices have fallen below stipulated levels.

In the absence of any agreement, the company would still be able to sell its production into the market, but would lose the benefit of these pricing floors.

At PGMs prices mid-2009, the loss of the GM contract was stated to have an annual financial impact on Stillwater of between $5-million and $10-million

Following the bailout though, the Car Czar has decided to shut down hundreds of dealerships to save some cash. Since then, 70 dealerships, largely due to the application of Congressional muscle, have been reinstated.

The fact that the judge in question backed the use of less-expensive suppliers in a financial reorganization is not all that surprising. Forcing GM to run its business better is a big part of the bailout and stimulus package.

So, next in the fray – the Montana-based Stillwater Mining Co, which billed itself as the country’s only supplier of the precious metal.

In early July, Frank McAllister, the mine’s chief executive, was told about severing relations with his firm in favor of cheaper suppliers in Russia or South Africa.

Still, the firm would like to get back with GM.

Stillwater produces palladium and platinum from two mines in the Beartooth Mountains of south central Montana, in the US.

The company managed to stave off the GM loss by increased PGM production and stronger metals prices. The company said it had no difficulty finding buyers for the displaced metal.

Auto story

Commodity prices are one reason that the 2011 Dodge Ram 3500, 4500 and 5500 Cab Chassis trucks will use DEF systems instead of Adsorber catalyst.

When Chrysler and diesel engine partner Cummins took advantage of the situation in 2007 to ensure the Ram HD’s 6.7-liter engine would be clean enough to meet 2010 NOx emissions standards, it’s move drew snickers from GM and Ford at the time.

Ram’s DEF-free Adsorber catalyst uses expensive precious metals like rhodium and palladium, to convert NOx to harmless nitrogen gas and water vapor.

Those metals peaked in price in 2008, when the global economy was at its hottest, before crashing back down in the last year to much lower levels.

They are on their way up again.

Price rise

On Monday in Asia, palladium added 0.8 per cent to $323 an ounce. Palladium has made particularly stellar gains, up 75 per cent so far this year, amid weak Russian supply and a relatively stronger outlook for US than European car sales.

According to analysts, hope for a sustained global economic recovery is placing the metal on a surer footing. Deutsche Bank sees palladium at an average $321, while JPMorgan sees palladium at $306, up from a forecast $250 for 2009.

ScotiaMoccatta’s annual forecast for 2010 suggests gold is forecast to trade between $850 and $1,400, while palladium is expected to range from $250 to $420.

Around half of all platinum and palladium produced each year is bought by the car industry for use in catalytic converters. On a global scale, palladium is set to benefit most from a demand recovery.

For palladium, there are also concerns over another major source of supply, Metals consultancy Johnson Matthey, for example, estimated that 24.9 tonnes of palladium from the Russian reserves was put on the market last year, 46.2 per cent less than in 2007, and has forecast another 30 tonnes will be sold in 2009-2010.

Russian foray

Upping its expectation on the shiny metal was Russian metal company Norilsk Nickel, top producer of nickel and palladium, which also raised its 2009 forecast for palladium production to 2.850 million ounces from 2.685-2.710 million ounces and platinum output to 668,000 ounces from 615,000-640,000 ounces.

Palladium output rose to 704,000 ounces from 686,000 ounces and platinum to 173,000 ounces from 157,000 ounces.

United Company RUSAL, the world’s top aluminum producer, holds a 25 per cent-plus-two-shares stake in Norilsk. The stake is deposited as collateral with state-owned bank VEB.

Interros, an investment vehicle of billionaire Vladimir Potanin, holds a stake of 25 per cent plus one share.

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