by David Jensen, Safe Haven:

With the spike in the London short-term palladium lease rates to 16% during the week of June 9, 2017, the market was signaled of a shortage of physical metal in London catching the attention of many market observers.

The London platinum and palladium market, as noted in the following article excerpt from 2013, is the dominant market for these metals. “… Peter Smith, head of the London Platinum and Palladium Market (LPPM), told Reuters that the majority of the market was now trading on a ‘loco London’ basis…” with the article also noting that large amounts of physical palladium had been moved from Zurich to London between 2009 and 2013 to make the London the dominant market for physical platinum group metals (PGM) trading and delivery of metal when desired.

The LPPM, as the second major precious metals market in the UK in addition to the gold and silver trading London Bullion Market Association (LBMA), has announced that it will merge with its sister organization the LBMA at the LPPM’s next Annual General Meeting on June 29, 2017. The global reference daily reference point platinum and palladium price auctions have now been moved to the London Metals Exchange (LME) but confusingly being called the LBMA Auction – more on this further below – with the pricing data owned by the LBMA.

One of the founding members of the LPPM when it was established along with the LBMA in 1987 is Johnson Matthey PLC and it continues as one of only 5 LPPM member participants in the new daily LME price auction.

Johnson Matthey (J&M) has two of its three large PGM refineries located in the UK and it is thus well positioned to understand both the trading dynamics of the LPPM unallocated spot contract paper market as well as the physical structure of the PGM market. J&M recently states “Over the last ten years, the market has been kept adequately supplied by a very large movement of palladium out of existing stocks, as is evidenced by trade statistics suggesting net withdrawals of around 10 million oz from Swiss and UK inventories between 2007 and 2016… …While we do not believe that above-ground stocks have been exhausted, no market can support large deficits indefinitely.” The spike in palladium lease rates appear to signal to all that the market may well be at an inflection point for palladium due to long term draw-down of available above-ground palladium stockpiles as hinted by J&M. See Reuters: London overtakes Zurich as Market for Platinum Group Metals

Given the dominant role of London’s LBMA/LME tag-team in establishing reference pricing for physical PGM trades, let’s have a look at UK export and import data to follow UK palladium metal flow using data from the UK’s HM Revenue and Customs. During the time span from 2013 to April 2017, the UK exported a net amount of 5.34M oz. of palladium from its vaults (see data table below).

Of note is that over the 4 months of January – April 2017, the rate of importation of palladium to the UK declined to total just 163k oz. for this period while UK palladium exports continued in 2017 at the roughly 2.8M oz. p.a. annual run rate of 2016. Also of note is that in 2017 both Russia and Switzerland, as prior major holders of vaulted palladium stockpiles, supplied no material amount of physical palladium to the UK resulting in the UK’s increased palladium flow deficit. While Russia stepped-in with more than 500k oz of palladium supply in 2016 to compensate for a drop in 2016 Swiss palladium exports to the UK, no such increased supply of metal is visible from Russia to the UK through April of 2017.

During this period, the lease rate of palladium in London steadily increased indicating that just this relatively small decline in ounces of palladium imported to the UK was enough to increasingly stress the London physical market. This gives an indication of the availability of physical palladium metal from London stockpiles as J&M stated, no market can support large deficits indefinitely. We may now be seeing that London physical metal stockpiles have dwindled to the point that they cannot even support small palladium import deficits for a short time irrespective of the availability of large amounts of unallocated spot contracts (paper metal) in London.

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These data indicate that since at least 2013, there have been persistent, large, and increasing draw-downs in UK physical palladium stockpiles.

Looking now at available data from the Swiss Federal Customs Administration, for 2016 and through February 2017, Switzerland has not been a source of material amounts of physical palladium to the global market despite stockpiles putatively held in Swiss vaults:

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