Industrial metals: beware, further bottlenecks in sight

by Emmeran Eder, Euro on Sunday

The war in Ukraine has led to fears that palladium could be in short supply. With a share of 37 percent, Russia is the second largest producer of the white metal in the world after South Africa. The price of the commodity also jumped above $2,600 a troy ounce after the invasion began. The value of the metal has been climbing again since mid-December, after falling significantly from $3,000 to $1,600 due to supply bottlenecks in the auto industry.

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However, since the auto industry has recently recovered, demand for palladium has also picked up, making the metal more expensive even before Putin’s attack. This is because it is primarily used in catalytic converters in petrol vehicles. Around four-fifths of the quantity produced goes there. The other areas of application are electronics (seven percent), chemicals (five percent) and medical technology, jewelery and investment.

Palladium: demand is increasing

The price of palladium is therefore heavily dependent on the auto industry. Despite the continued growth in electric vehicle sales expected in 2022 and the chip shortages still partially slowing production, palladium demand is expected to increase by eight percent. A supply deficit for the raw material is therefore to be expected in 2022.

Electric cars don’t need palladium, but hybrid vehicles do, and their number is growing rapidly around the world. In addition, there are still many conventional petrol vehicles on the roads around the world. In addition, China, the world’s largest car market, plans to tighten emissions regulations again in 2023, which is likely to increase demand for palladium, since larger quantities of the white metal are needed in the catalytic converters to meet them.

So even without the Ukraine crisis, there is already a lot to be said for the metal becoming more expensive. However, the West’s sanctions against Russia and counter-sanctions could lead to palladium deliveries from the largest country in the world coming to a standstill or failing altogether. The South African producers have already stated that they cannot compensate for such shortfalls. Price peaks could then occur in the short term. “Should the sanctions be tightened, the old high of $3,000 should come back in sight for palladium. The market deficits in previous years have meant that available inventories are limited,” says Henrik Marx of precious metals dealer Heraeus.

Russia does not play quite as important a role in aluminum as it does in Weimetall. But after China, the United Arab Emirates and Canada, it is the world’s fourth largest exporter of the metal.

Aluminum: Imminent supply gaps

The US sanctions imposed on Russia do not affect the aluminum industry. “But we don’t see the danger of supply shortfalls averted, because Russia itself could export fewer commodities as a retaliatory measure,” warns Daniel Briesemann, commodities analyst at Commerzbank. If there is a shortage of supply, this is offset by low inventories. At just over 820,000 tons, these are globally near the 15-year low.

However, the supply on the aluminum market is already limited even without possible supply failures in Russia, since, for example, production in several European smelters has been curtailed due to high energy prices. A further rise in gas prices could prompt even more smelters to scale back production. After all, the production of aluminum, which is primarily used in cars, airplanes and building construction, is enormously energy-intensive. Since gas and electricity are very cheap in Putin’s empire, cheap Russian aluminum is just not available on the world market.

This could also soon be the case with nickel. At least, that’s what many investors think. At more than $25,000, the price of a ton of nickel climbed to its highest level since 2007. The reason for this is that Russia is the world’s third largest mining producer of the metal with a share of around nine percent and the Russian raw materials group Norilsk Nickel is the largest miner of high-purity nickel metal.

Nickel: Electric cars increase demand

For a long time, nickel only played a minor role among the industrial metals and was mainly used in steel. But interest has increased significantly. Nickel is an important component in modern lithium-ion batteries. It’s in almost every place where batteries are used. Due to the strong growth in the electric car industry, demand has risen sharply. Demand for nickel is likely to remain high. According to estimates, by 2025 more than one fifth of demand will come from the automotive industry.

For nickel, palladium and aluminum, there does not seem to be any sign of a quick relaxation. Consumers of raw materials are reluctant to buy in Russia because of the uncertain legal situation. Western banks refuse to finance the deals. Because of the tense security situation on the Black Sea, insurance companies no longer want to insure shiploads or are demanding high premiums. Since air traffic between Russia and the West has largely come to a standstill due to the mutual blocking of airspace, this transport option is no longer available. In the short term, prices are therefore likely to rise further.

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