One of the biggest conundrums in the bullion markets at the moment is why PGM prices remain relatively lacklustre despite the fact that we are now into week 12 of the South African producer strike... there are however signs that this may be about to change.

Granted that mine production has not fallen to zero - but we know the production pipeline is remarkably thin and supply disruptions have historically impacted prices disproportionately as industrial companies - car makers in particular - chase the market higher. As such, market traders will record the more than doubling of prices and the cost of borrowing exceeding the cost of buying the metals (work that one out) as available supply evaporates overnight.

Looking back over the last few years we can say that despite ongoing global economic weakness, the car sales has remained relatively impervious to the downturn despite being a big ticket item - in fact new car demand has actually risen to an all time high of over 80 million cars per annum (that's 2.6 cars per second). As such, we can say that PGM offtake has over the last few years remained surprisingly firm... which only goes to make the non-reaction to the current outages all the more surprising.

Platinum and palladium lease rates are normally regarded as the advance warning that something is amiss and will invariably presage a move in prices. Platinum borrowing costs are, to all intents and purposes, completely unchanged suggesting that loco Zurich stocks remain plentiful and the market has easily absorbed the mine supply problems. Borrowing costs are currently around 0.28% for the 2 month and the 6 month period.

Palladium however is just starting to respond. The two and six month rates have doubled from 0.25% to 0.5% but in general terms remain 'affordable'. With old Russian palladium stocks said to have been largely exhausted about a year ago, the market demand has hitherto been satisfied from current production until now.

The oddity about this however is that palladium is responding and not platinum given that South African production is predominantly platinum (which is strike-bound) whereas palladium is predominantly from Russia (which is not...). It remains to be seen whether this is an extension of the Russians withholding gas to Europe story or whether this is a genuine supply issue - either way, palladium may just be primed for a roller-coaster ride.

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