Sales of new cars in developing countries are forecast to grow, even as supply of the metal is in deficit
Categorised as a precious metal, palladium is part of what are popularly referred to as Platinum Group Metals (PGM) with increasing industrial application, mainly in auto-catalysts (for automobiles), electrical, dental and chemical industries.
Jewellery sector demand is limited. Auto-catalysts for cars that run on gasoline require a higher content of palladium (unlike diesel cars that need more platinum for auto-catalyst), and majority of cars sold in the US and major developing countries such as China and India run on gasoline.
With the world’s top two producers Russia and South Africa accounting for about 80 per cent of the total primary supply, the market is vulnerable to supply-related developments in the two key producing countries.
With rising prices, scrap sales are expanding.
It is evident from the table that the market is in sizeable deficit. From a supply perspective, palladium runs the risk of erratic availability from South Africa (which accounts for a third of primary production). The country faces power supply issues and continuing tensions between mine workers and producers.
In the event, the market will place greater reliance on Russia where producers have shown willingness to ramp up output. However, Russian state stock shipments have slowed of late.
On the demand side, sales of new cars in developing countries are forecast to grow, while car sales in the US will be supportive.
Faster and more sustained economic growth, especially in BRIC countries and North America, can drive palladium prices significantly higher, while threats to the supply side too can have the same effect.
Physically-backed ETP (exchange-traded products) holdings currently total an estimated 2.2 million ounces.
The prospects of a new ETF launch in South Africa are rated high; and in the event, inflows may pick up which, in turn, would deepen the deficit for 2014. On the bourses, speculative positioning has fallen well below the peak which implies room for growth across the investment community.
However, the biggest risk to palladium prices remains an unexpected global economic slowdown which would lead to a decline in automobile sales.
In simple terms, currently, in the world palladium market, constrained supply is battling a healthy demand growth profile. Supply and demand projections suggest the world market will continue to be in deficit in 2014 and into 2015.
Johnson Matthey has forecast palladium to trade over the next six months at an average price of $760 an ounce within a broad range of $680/oz and $815/oz. Some analysts are slightly more bullish.
In 2014, the palladium market is likely to retain its crown as the best performing precious metal.
In the absence of new triggers, price gains are likely to be modest given the stock levels.
While the metal enjoys some upside price potential from the current levels of around $740/oz in the global market, prices in India would depend on the exchange rate. The prospect of a weaker rupee looming, the metal faces upside price risk here as well.
Palladium is silvery white and does not tarnish if exposed to air. Though more than half of all palladium consumed goes into automobile catalytic converters, it is also used to make white gold. White gold is popular with jewellery buyers.