Palladium Fund Launches In South Africa, As Russian Supply Fears Warm Prices

South African investors could take interest in a fresh palladium exchange traded fund (ETF) due to launch on Thursday, under African investment bank Absa Capital.

Palladium is a hybrid industrial and precious metal, used in investment, niche jewelry and automobiles as an element of emissions-control equipment. There are concerns about a steady supply of the metal in the wake of Russia's military maneuvers in Ukraine, partly as sanctions could hamper Russian palladium exports.

The fund comes almost a year after Absa Capital launched a similar successful fund in South Africa for sister metal platinum. That fund has since grown to be the biggest platinum fund of its kind in the world, amassing almost 950,000 ounces.

"We will be able to provide full liquidity from the first day of listing, which means there is no limitation on trading," said Vladimir Nedeljkovic, who heads exchange-traded products for Absa Capital, in a statement last week.

Investors will gain easy access to palladium bullion prices in South African Rand terms, in the world's second-largest producer of palladium and the largest miner of platinum. Platinum and palladium are often viewed as related metals partly because they're both used in catalytic convertors in cars.

South African institutional investors could derive extra advantages from the fund, said Nedeljkovic in an email to IBTimes. Investments will be treated as domestic assets, so South African institutional investors can avoid burdensome investment rules concerning foreign assets, he said.

There's significant investor demand for the fund, and there could be a short-term upward impact on prices, New York's CPM Group wrote in a December 2013 note.

"There could be an interesting trade in selling platinum and buying palladium in advance of the move," said CPM Group then, noting that institutional investors may switch from Absa's platinum fund to its new palladium product, to adjust portfolio weightings.

"Platinum prices may be weighed on and palladium prices will be supported, because of that reshuffling in the PGM [platinum group metals] area," said Carlos Sanchez, CPM Group's head of commodities, to IBTimes in December.

It may be difficult for foreign investors to participate in the fund, however, said attorney and precious metals specialist Anthony Tu-Sekine to IBTimes.

Local institutional investors could also experience fatigue with precious metals investments, after pent-up demand was absorbed by the platinum fund launch in 2013, Tu-Sekine said. He advised a rival platinum and palladium fund owned by Sprott Asset Management LP on its 2012 launch, though the fund owns far less platinum than its Absa rival platinum fund.

Palladium prices have spiked in recent weeks, hitting their highest since 2011. Palladium traded at $776 per ounce on Wednesday.

"Any restrictions on Russian palladium exports would exacerbate what is already expected to be a large palladium deficit in 2014," wrote ETF Securities in a research note on Monday. Russian miner Norilsk Nickel (MCX:GMKN) said in late 2013 that there'd likely be structural deficits of the metal in years to come, as mine output fails to match rising demand.

Absa Capital is an African investment bank affiliated with Barclays PLC (LON:BARC). Rival Standard Bank launched South Africa's first palladium ETF on the Johannesburg Stock Exchange this Monday, beating Absa to the punch by less than a week, Reuters reported.