Metals traders ‘self-sanction’ for key Russian palladium, disrupting markets

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The reluctance of precious metals traders to handle Russian-produced palladium is creating an unusual and persistent dislocation between the world’s two major markets.

In the European hubs of London and Zurich, traders can select the origin of the metal they receive, while those taking delivery of a New York Mercantile Exchange futures contract do not have the same choice. The threat of receiving Russian bullion helped push New York futures to around $30 an ounce discount to same-date futures in London and Zurich.

Such a discrepancy would generally create arbitrage opportunities for traders who can buy the metal in one city and ship it to another, possibly reducing the price discrepancy. However, the perceived risks in trading the Russian metal – even where it is allowed – are keeping traders on the sidelines and prolonging the dislocation, according to two traders.

Russian palladium has not been sanctioned and only newly minted bullion is subject to restrictions in European or US markets. However, traders fear getting stuck with Russian-branded bars if they are unable to sell them. “Self-sanction” is a theme playing out to varying degrees in commodity markets as traders and manufacturers grapple with whether to go beyond government-imposed restrictions.

The London Platinum and Palladium Market and CME Group Inc – which owns Nymex – removed Russian refiners from their accredited lists last month, meaning newly minted bullion cannot be bought and sold at the two trading centres. Those made before the suspension can still be bought and sold, but traders are reluctant to deal with them, the people said.

CME declined to comment.

Russia is the world’s largest producer of palladium, accounting for around 40% of the world’s mining supply. So far its exports of the metal, which is used to make catalytic converters in petrol cars, have only been targeted by the UK with increased import duties.

MMC Norilsk Nickel PJSC, the only Russian producer, sells metal under contracts to long-term customers. However, there is already a significant amount of Russian metal on the market, in some cases dating back to Soviet times.

In theory, traders could ship Russian-branded bullion to refiners to have them remelted, removing all trace of their origin. However, refineries are also reluctant to process the metal, according to people familiar with the matter. At least one refiner was approached to do so but turned the company down, one of the people said.

The dislocation echoes the chaos that engulfed precious metals markets in 2020. When the pandemic grounded flights and forced refineries to close, bullion banks worried about their ability to ship metal from London to the United States. United, leading to massive price dislocations in the two markets.

Eventually, with the help of charter flights, traders were able to arbitrate the two markets, closing the gap and generating massive profits for some traders.


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