Palladium to build on record peak as market tightens again
Reuters
Published Oct 03, 2019 09:34AM ET
By Peter Hobson
LONDON (Reuters) - Palladium is likely to rise still higher after growing demand from automakers and a gaping supply shortfall pushed prices to record levels above $1,700 an ounce this week, analysts said.
Used in vehicle exhausts to reduce harmful emissions, palladium has almost doubled in value from a low in August last year as tighter environmental regulation forces carmakers to buy more.
Shortages of metal eased this summer, causing prices to dip, but auto manufacturers, who account for 80% of palladium consumption, have ramped up purchases in recent weeks, Mitsubishi analyst Jonathan Butler said.
"Over the next 12-18 months we are probably going to see $2,000 in range," he said.
(GRAPHIC - Palladium, gold and platinum prices: https://fingfx.thomsonreuters.com/gfx/ce/7/6734/6716/PALLADIUM%20GRAPHIC%20PRICE.jpg)
In a sign that less metal is available, palladium forward and lease rates have leaped back above 5% from close to zero over the summer.
The market also moved deeper into backwardation, a situation associated with supply tightness when contracts for metal for near-term delivery are more expensive than later-dated ones.
(GRAPHIC - Palladium forward rates: https://fingfx.thomsonreuters.com/gfx/ce/7/6735/6717/PALLADIUM%20GRAPHIC%20RATES.jpg)
Amplifying the effect on prices is the small size and low liquidity of the palladium market, which make it more volatile.
More stringent regulation means demand is expanding despite slowing global economic growth and falling car sales in key markets including Europe, the United States and China.
Rules entering force in China, the biggest auto market, from next year will require each vehicle to contain around 30% more palladium, platinum and rhodium, analysts at Morgan Stanley (NYSE:MS) say.
(GRAPHIC - Palladium auto demand: https://fingfx.thomsonreuters.com/gfx/ce/7/6736/6718/PALLADIUM%20GRAPHIC%20DEMAND.jpg)
Palladium is also riding the coattails of a wider boom in precious metals prices as investors seek shelter from economic uncertainty in assets traditionally seen as safe, said Philip Newman at consultants Metals Focus.
"(Palladium) prices, in terms of the upside, have got some way to go," he said.
Newman predicted an eighth consecutive annual shortfall - of 617,000 ounces - this year in the roughly 10-million ounce a year palladium market.
"We don't see a deficit disappearing," he said, adding that above-ground stocks had fallen to around 13 million ounces from around 18 million ounces at the end of 2010.
(GRAPHIC - Palladium deficits: https://fingfx.thomsonreuters.com/gfx/ce/7/6737/6719/PALLADIUM%20GRAPHIC%20DEFICIT.jpg)
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Speculative positioning remains relatively muted, suggesting genuine industrial demand is powering prices.
Speculators' bets on higher prices on the NYMEX exchange outnumber bets on price falls by 12,780 contracts, equivalent to 1.3 million ounces – up slightly from August but only around half the level of recent peaks in 2018 and 2013-14.
(GRAPHIC - Palladium speculative positioning: https://fingfx.thomsonreuters.com/gfx/ce/7/6738/6720/PALLADIUM%20GRAPHIC%20POSITIONING.jpg)
In the over-the-counter market however, speculators have increased wagers on price gains, said Mitsubishi's Butler.
These bets help push prices higher but expose the market to the risk of price falls if investors exit their positions.
"Palladium remains in a structural bull market that can deftly capitalize on any spark… to reach new highs," said Scotiabank analyst Nicky Shiels. "But the later the business cycle gets, the more the downside opens up."
That is feeding into forecasts for a longer-term correction after near-term gains. Many analysts expect prices to turn lower as automakers slowly reduce the amount of palladium they use in favor of platinum, which is now nearly $800 an ounce cheaper.
JPMorgan (NYSE:JPM), Morgan Stanley, Macquarie and BMO forecast average prices for 2023 ranging from $1,000 to $1,189.
"It is rare for any commodity to remain this far above long-term norms for a prolonged period," said analysts at BMO. "We still believe demand destruction will be a necessary evil over the next two years to restore equilibrium."
Written By: Reuters
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