Western sanctions distort palladium market

By: Frank Knopers

Western sanctions against Russia are also having an effect on the precious metals market. At the beginning of March, the LBMA six Russian smelters of the LBMA list, as a result of which gold bars and silver bars from these smelters are no longer freely tradable in London. Now the first problems are also presenting themselves in the palladium market. For example, the price of a troy ounce of palladium in New York is currently $30 lower than in London or Zurich. Where does this price difference come from and what does it mean for the market?

Since Russia's invasion of Ukraine, many traders in the Western world have been reluctant to do business with Russia. The threat of sanctions means that commodities from Russia, including precious metals, are worse in the market. And that also affects the market for palladium, an important raw material for the automotive industry. Manufacturers use this precious metal for catalytic converters, which reduce the emission of harmful exhaust gases from gasoline engines. About forty percent of the world's palladium production comes from Russia.

What's going on with palladium?

Like many other commodities, palladium is also an active futures market, where traders contract for future supply. On the New York Mercantile Exchange, an American futures market, the price of palladium is currently $30 per troy ounce lower than the price in London. The reason for this is that, in the case of this contract, traders do not know in advance the origin of the palladium that they will eventually be supplied. Since Russia is a major producer, traders in New York run the risk of getting births with a Russian stamp. These bars are currently less well positioned in the market due to Western sanctions.

This is different for trading centres in London and Zurich, where traders can choose the origin of the palladium. Because of the risk that traders in New York will receive palladium with the stamp of a Russian smelter, the price for those contracts is lower than in European centers. Normally, a price difference of $30 per troy ounce would be reason for traders to buy palladium in New York and sell it for a higher price in London or Zurich. However, this is not happening for the time being. The risk that traders will no longer be able to resell the palladium from Russia hinders this form of arbitrage.

Arbitration

In theory, traders can buy the palladium from Russia at a discount and have it melted down. Another smelter can then market these bars as 'good' palladium. But smelters have also become reluctant to process precious metals from sanctioned countries. Evading sanctions could potentially affect their LBMA accreditation.

This situation in the palladium market is reminiscent of the oil market, where Russian oil is offered at a discount. India is now buying Russian oil at a discount of $30 a barrel. There are also traders who mix Russian oil to circumvent the sanctions. With palladium, too, traders will eventually be able to find a workaround. Palladium is an essential precious metal for the automotive industry. And Russia is a major supplier of palladium. It therefore seems only a matter of time before this price difference will be eliminated.

This contribution comes from Geotrendlines

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