RE: FITCH - Russian Mining Report15 Mar 2022 20:01
Part 1
14 Mar 2022
Russia
Mining
Key Views
We are still assessing the market fallout for Russian production and exports of platinum and palladium, but see immediate market risks due to supply chain disruptions and have revised 2022 y-o-y production growth downward for each to 6% and 10.5% respectively. Longer-term impacts are less clear. Gold, however, is at immediate risk from a combination of market reactions to sanctions and sanctions risks, which we believe will negatively affect production. We forecast that production will remain flat at 0% y-o-y growth this year, growth just 1.5% y-o-y in 2023, and average 1% growth through 2031.
Since neither platinum or palladium exports are directly sanctioned and there remain Russian banks excluded from existing SWIFT sanctions, we expect trade to normalise later this year or in 2023 so long as existing financial sanctions affecting trade are not tightened. However, it will face constraints from flight bans and the loss of access to aeronautical supply chains for Russian carriers.
Surging input costs for domestic firms, manufacturing, and labour are also likely to negatively affect investment planning in the near to medium-term, but we require more clarity on how domestic markets, firms, and policymakers will react. The potential for export bans poses more risks for platinum and palladium rather than gold. However, the potential US secondary sanctions on sales of Russian gold and pressure to stabilise the ruble in Russia may trigger a creeping ‘nationalisation’ of gold production and decline in market transparency.
We forecast platinum and palladium production in Russia to recover, but much more weakly than previously forecast after two consecutive years of significant decline. We expect platinum production to grow 6% y-o-y and palladium production to grow 10.5% y-o-y in 2022. Eurasia Mining is the only foreign firm with operational or new projects in the pipeline in Russia and while the company is adamant that sanctions have thus far not affected its operations, the company had begun spinning off its platinum, palladium, and gold assets into a separate subsidiary before the conflict began. Growing risks the Russian government will seize assets from foreign firms that attempt to close their operations or else intervene in operations deemed strategically or politically sensitive may deter firms from committing to investments. Similarly, disruptions to export routes because of various flight bans are also likely to reduce profit margins. Russian miners Norilsk Nickel and Polymetal International face the same logistical problems, but are likelier to receive support of some kind from the state if need be. Issues with airfreight and greater counterparty risk for importers may benefit other producers seen as less risky.
Continued
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