Gaping supply deficit ushers palladium price into golden zone

October 8, 2018

London (Oct 8)  Palladium is outshining other major precious metals, more than doubling in value since early 2016 to leave prices of sister metal platinum in the shade and put parity with gold firmly in sight.

Tight supplies, large deficits and resurgent interest from speculative investors are expected to keep palladium near record highs after prices soared nearly 30 percent in seven weeks.

The metal, used mainly in emissions-reducing autocatalysts for vehicles, is trading around $1,060 an ounce - within spitting distance of January's all time high of $1,138.

"We are in a structural deficit that isn't going to be resolved in the next 2-3 years," said ICBC Standard analyst Marcus Garvey.

"The risk is that prices continue to go higher."

Autocatalyst maker Johnson Matthey expects a deficit of 239,000 ounces this year, while researchers GFMS - who predict lower supply and higher investment - see a shortfall of more than 1 million ounces in each of the three years to 2020 in the roughly 10-million ounce a year palladium market.

That gap is hard to fill with new production because palladium is mainly a byproduct of other metals like platinum and nickel, and South Africa, a key producer, is shuttering unprofitable platinum mines.

One warning sign for palladium is the weaker car sales seen in recent months in China, the world's biggest market, and flat sales in the United States. The auto industry accounts for 80 percent of palladium demand.

"The fundamental backdrop (for palladium) has weakened," said Julius Baer analyst Carsten Menke, adding that $950 was a fair price for the metal.

But another risk - that auto makers will substitute palladium for cheaper platinum - is not yet a threat, according to analysts at Citibank.

"The process will take years and there are no signs of major shifts as yet," they said, predicting prices at $1,175 in 2019 and $1,150 in 2020.

With fears that a U.S.-China trade war will puncture global economic growth diminishing and Europe's car industry embracing palladium-heavy gasoline-powered cars after a diesel emissions scandal, many analysts are bullish.

Bolstering their case are lower palladium stockpiles.

Inventories in warehouses monitored by the Nymex exchange, at 48,465 ounces, are near their lowest since 2003. Holdings of palladium-backed exchange traded funds (ETFs) - which have helped to plug gaps in the market in recent years - have fallen below 1 million ounces from 2.6 million ounces in 2015. And Norilsk Nickel, the world's largest palladium producer, said in August that in the first half of this year it sold 350,000 ounces of the 550,000 ounces it had in a reserve fund, Russia's Interfax news agency reported. The market remains in backwardation -- meaning that nearby metal costs more than metal with later delivery dates -- suggesting that supply is short.

Speculative investors have meanwhile slashed bets on higher prices.

Their net long in Nymex palladium collapsed from more than 27,000 contracts, equivalent to over 2.7 million ounces, in January to 110,400 ounces in August, before making a partial recovery to just over 1 million ounces. That financial selling, rather than a lack of industrial demand, explains the fall in palladium prices over the January to August period, said ICBC Standard's Garvey.

And it means that speculators now have plenty of room to rebuild long positions, which would drive prices higher, Mitsubishi analyst Jonathan Butler said.

On the technical front, palladium was struggling to stay above its steep uptrend coming in around $1,060.

Failure would see a slide back to between the 55-day moving average at $965 and 200-day moving average at $990, while a move above resistance at $1,073 and $1,095.51 could open the way to new highs, analysts at Commerzbank said.


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