Recycling and increasing output knock palladium price
Johannesburg-SA (Jun 19) WHEN gold and silver were languishing, investors in precious metals were betting that palladium would soar as record car sales boosted demand for catalytic converters.
It turns out, though, that there is more of the metal around with recycled palladium from junked vehicles and rising mine output.
For a third consecutive year, the amount of scrap will be the highest on record, accounting for 30% of supply, Barclays predicts.
Investors amassed record holdings last August in exchange-traded products backed by palladium, which is used in catalytic converters to reduce harmful tailpipe emissions.
Since then, Chinese car sales have slowed down, mine output in SA will jump the most it has in three decades, and prices have plunged 20% into a bear market at $724.65/oz.
ABN AMRO says palladium may slip 10% further by year-end to $650, the lowest since June 2013.
"There will not be a huge increase in demand on a net basis since a lot of palladium should come back from the cars that are being replaced," said Donald Selkin, who helps manage about $3bn as chief market strategist at National Securities Corporation in New York.
Mr Selkin, who is underweight in precious metals, said palladium prices would keep falling.
Demand for new cars has sparked an increase in junked vehicles, which recyclers use to recover the few grams of palladium inside old catalytic converters.
In the US, the largest car market after China, sales last month rose at an annualised rate of 17.8-million vehicles, the fastest since 2005, according to Autodata.
That would probably mean a record 2-million ounces of palladium coming from old cars this year, said Patrick Magilligan, head of market research at A-1 Specialized Services & Supplies, a recycler of platinum-group metals based in Croydon, Pennsylvania.
Mr Magilligan said used catalysts would represent a significant supply source.
Combined with used palladium from electronics and jewellery, recycled supplies will jump 4.5% this year to 2.87-million ounces, according to London-based Johnson Matthey, which makes about a third of the world’s catalytic converters.
Supplies also would get a boost from SA, the largest producer behind Russia, after a five-month strike that cut output by the most in more than three decades.
With the walkout ended, the mines will increase production by 17%, the most since 1984, Johnson Matthey estimated.
That will trim the global production deficit to a four-year low of 100,000oz from a record 1.83-million last year, it said.
Demand was still exceeding supply, which would probably help revive prices, said Michael J McMullen, CEO at Stillwater Mining Company in Montana, the largest palladium producer in North America.
Even after dropping from a 13-year high of $913/oz in August, futures on the New York Mercantile Exchange are up 50% from five years ago.
Some bullish investors remain.
Holdings in exchange-traded funds have increased to 91.9 tonnes, up from 65 tonnes in February last year, according to data compiled by Bloomberg.
Goldman Sachs on May 22 reiterated a February recommendation to buy palladium and sell platinum, a companion metal that is sometimes used as a substitute in catalytic converters.
In China, the world’s biggest car market, vehicle sales have slowed with the economy and purchase restrictions this year, while the booming stock market has diverted funds away from car purchases.
Passenger vehicle deliveries last month rose at the slowest pace for the month of May, according to the Passenger Car Association.
Russia, the largest producer, still faces international trade sanctions related to that country’s incursions in Ukraine.
Prices fell to a 16-month low on Wednesday amid concern that higher interest rates in the US would push the prices of all commodities lower. Global supplies, including mines and recycled metal, will jump 4.8% to 9.276-million ounces this year, said Johnson Matthey.
Speculators who in November 2013 were the most bullish since the US government began tracking the data in 2009 have cut their net long positions in palladium futures by 46% to 14,401 contracts, the fewest since December 2012.
"When we hit the highs in 2014, we were in the midst of a perfect storm, with supply disruptions in SA, high demand from new exchange-traded funds and threats of sanctions against Russia," said Jonathan Butler, a precious metals strategist at Mitsubishi.
"It will take some doing to get up to those levels again, given the potential for supply from recycling to feed the market."