A surge in palladium prices has thrown struggling South African mining companies a lifeline. But it may not be enough. Besides patchy power supplies and high labour costs, South African miners are saddled with ore that typically produces twice as much platinum as palladium — just at a time a global platinum surplus is weighing on prices.

Russia’s Norilsk Nickel (Nornickel), the world’s biggest palladium producer, meanwhile, has emerged as the winner from the reversal of platinum’s long-standing premium over palladium, because the ore it mines is far richer in the latter.

Unlike South African mines, Nornickel’s ore produces four times as much palladium as platinum and the company has lower extraction costs, leaving it in prime position to benefit from palladium’s bull run and reinforce its dominance.

Nornickel said in November it would spend $10.5 billion to $11.5 billion in the coming years to boost its metals output. It plans to raise production of platinum group metals (PGMs) from its Arctic mines by 25% from 2017 levels by 2025 - an increase of about 860,000 ounces.

Platinum and palladium are both mainly used in autocatalysts to reduce car exhaust pollution. But while palladium goes into gasoline cars, platinum is mainly used in diesel vehicles and it has fallen out of favour since the emissions cheating scandal.

“We see the current palladium premium over platinum as sustainable in the mid-term as it is justified by higher fair value-in-use in the automotive industry,” said a Nornickel spokeswoman.

Palladium hit a record $1,620 an ounce in March, a surge of nearly 100 per cent since August. It has slipped back to around $1,335, but is still more expensive than gold.

Platinum, meanwhile, sank to a 10-year low of $751 an ounce in August, a far cry from a peak of $2,290 in 2008. Platinum prices are now around $850, partly supported by bets from some investors who believe the price has sunk too low.

“Norilsk is benefiting handsomely from the higher palladium price and most of South African mining can’t keep up,” said Nedbank analyst Arnold Van Graan.

Spending more to crank up production and take advantage of record palladium prices just leaves South African miners with even more platinum when the market is expected to have a surplus for the fourth year in a row. For Nornickel, investing to expand makes more sense given the market dynamics.

“Palladium is now the largest revenue source for Nornickel, followed by nickel and copper and therefore investors like the purer exposure to key industrial metals,” said Roger Jones, a fund manager and head of equities at London & Capital. According to consultants Metals Focus, higher car industry demand should leave the palladium market with a deficit of 574,000 ounces in 2019, the eighth year of shortfalls in a row. Platinum is expected to have a surplus of 630,000 ounces.

Overall, the basket price of PGMs in South Africa has risen about 30% over the past year thanks to palladium, but miners are not generating enough returns given the composition of their ore to boost production significantly.

“It’s a tremendous difference from a year ago but we are not out of the woods yet as a sector,” Northam Platinum CEO Paul Dunne said, adding that the PGM basket price would need to rise another 20% for most South African mines to be sustainable.

In 2018, margins for South African platinum miners were negative on average, the industry made an aggregate loss and capital expenditure was less than a billion dollars, said industry group Minerals Council South Africa.

Rising costs, including higher wages and electricity bills, are also eating away at margins.

Anglo American Platinum (Amplats), the top South African palladium producer, resumed dividends in 2017 for the first time since 2011 and raised its dividend payout-ratio this year, but it too is shying away from major spending.

Instead, it is focusing on incremental increases from its palladium-rich Mogalakwena mine. Amplats is studying how to lift PGM output from Mogalakwena by about 500,000 ounces in four to five years from 1.2 million ounces last year.

Mogalakwena sits in the Northern limb of the South African platinum belt where the ore contains relatively more palladium.

But most mines owned by the major miners sit on the Western limb. They contain more platinum, are older and much deeper, making them more expensive and labour intensive to mine.

Impala Platinum, which has seen its profits rise, is closing shafts and cutting thousands of jobs at its Rustenburg mine to try to return it to profitability.

Impala is reviewing an option to raise its stake in a palladium deposit owned by Platinum Group Metals but plans no major expansion itself.

Reuters