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Palladium powerhouse: Polar projects to put Russia ahead of South Africa

Russia is on track to markedly overtake South Africa and become the world's largest palladium producer in 2023 with the ramp-up of PJSC Norilsk Nickel Co.'s South Cluster project in the Arctic, according to S&P Global Market Intelligence data.

Until then, the rivals are forecast to vie for dominance. Russia is expected to edge ahead of South Africa in 2019 and 2021, with the tables set to turn in 2020 and 2022. The forecast by Market Intelligence's Metals & Mining Research team is based on operating mines and estimates for feasibility-stage projects.

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South Africa outproduced Russia by 155,000 ounces in 2018, but the tide is turning as Norilsk looks to expand its output through several projects in the Arctic Circle. The company approved two key growth projects in March — South Cluster and expansion of the Talnakh concentrator — and has a pipeline of projects awaiting approval, including its Arctic Palladium joint venture with Russian Platinum LLC.

The price of the precious metal crossed US$2,000/oz on Dec. 17, 2019 — from below US$1,000/oz in late 2018 — as power problems in South Africa disrupted mining, further pinching the already short supply. Meanwhile, tightening emission regulations require automakers to, in effect, use more platinum group metals in catalytic converters. While cheaper platinum can serve this function well at the lower temperatures in diesel engines, palladium performs better at the higher temperatures of petroleum engines.

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Norilsk recently unveiled ambitious production targets for 2030 onward after years of steady output of its key metals: nickel, copper, palladium and platinum. The company is aiming to raise combined PGM production by between 30% and 95% from 2017 levels of 105 tonnes, to between 140 and 150 tonnes, or as much as 160 to 205 tonnes if the Arctic Palladium project goes ahead. Roughly 4.5 grams of palladium are produced for each gram of platinum by the mining group.

Such a large expansion will not come cheaply. Capital expenditure, which includes approved projects and maintenance, is expected to peak at an average of between US$3.5 billion and US$4.0 billion per annum from 2022 to 2025, from an estimated US$1.3 billion to US$1.5 billion in 2019.

The Arctic Palladium project, which aims to create the largest greenfield PGM cluster in the world, would cost another US$2.8 billion to US$3.2 billion. The first stage would be to develop an open pit at Chernogorskoye by 2024 with a capacity of 7 million tonnes per annum, rising to a total capacity of 21 mtpa in the 2030s with the development of two underground mines at Maslovskoe and the southern part of the Norilsk-1 deposit, part of Norilsk's Polar Division.

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The chairman of Russian Platinum, Musa Bazhaev, told Russian President Vladimir Putin at a meeting in November that "the creation of this [Arctic Palladium] joint venture will make Russia the world's leader in the production of platinum group metals."

Norilsk is already the world's top palladium producing company with a market share of 39% in 2018 and accounts for almost all of Russia's PGM output from a group of rich deposits around the city of Norilsk on the Taymyr peninsula in northern Siberia.

There are, however, large projects on the horizon in southern Africa with high palladium content, such as Platreef and Waterberg in South Africa and Darwendale in Zimbabwe. "If these projects came online then there may well be oversupply of palladium with increases in Russia too, meaning some of the Russian expansion projects may not happen," Market Intelligence mining analyst Jason Holden said.

Russia might stay ahead in palladium production but is unlikely to overtake South Africa in platinum or combined PGM, according to Holden. While South African deposits generally have higher platinum content, Russia and Zimbabwe have more palladium. South Africa tends to be richer in minor platinum group metals such as rhodium, ruthenium and iridium.

UBS expects market tightness to persist as palladium heads into a ninth consecutive year of market deficit in 2020 and the price of the white metal to rise above US$2,000/oz, according to a Dec. 5 note by commodity analyst Giovanni Staunovo. "Investors need to be aware that the metal's relatively small market and low trading volumes could result in large price swings," Staunovo wrote.