Of all the LME-listed metals, palladium is the only one not to have decreased since the beginning of the year. Gold and platinum dropped 26% and 10% respectively, copper 14% and aluminum 15%. The London Metal Exchange Index, the composite index of the LME‘s six primary non-ferrous metals, fell more than 15%.
The precious metal has sound fundamentals especially with a Chinese car production growth in double digits. The listing of an ounce of palladium could reach $800 in 2014 and gradually climb to $1,000.
Gross demand for palladium should fall 3.4% in 2013 to 9.63 million ounces, driven by an 84% drop in investment demand for the metal to 75,000 ounces, said Johnson Matthey PLC. This, combined with lower demand for palladium from the jewelry and industrial sector, should outweigh record-high usage of the metal in the automotive sector, which uses palladium in the catalytic converters that scrub fumes from vehicle exhausts.
A “golden cross” set to form on palladium‘s chart suggests the auto-catalyst metal has room to rally in the next several months, reflecting fund buying on hopes of a better economic outlook, analysts said.
“Just because the stock market is doing well, palladium is doing more decently relative to the other precious metals because of its industrial uses,” said Rick Bensignor, head of trading strategy at Wells Fargo Securities in New York. Prices have largely traded in a range between $640 and $780 an ounce this year. It has rallied toward heavy technical resistance in an area from $760 to $780 six times since January but has failed each time.
Ongoing supply disruptions in South Africa, which accounts for nearly 40 percent of annual mine output, combined with promising, demand-side developments, particularly in China‘s auto and jewelry sectors, are supporting platinum and palladium, states Terry Hanlon, president of Dillon Gage Metals. “Both metals have upward potential into next year.”
Russia, representing half the world production, has been slowly selling off its palladium stockpile for years, over and above the exports from its mines. The steady decline in Russian stockpile sales from 800,000 ounces in 2011 to 400,000 ounces in 2012 to an expected 200,000 ounces this year, presumably ending completely by 2014, leads many to believe Russia’s palladium reserves are almost completely gone. You can imagine what that news will do to the metal’s price should it ever be officially confirmed.
China‘s battle against air pollution will benefit the platinum and palladium markets, Hanlon explains. Chinese officials hope to fully implement national IV emissions standards next year. China’s new standards are similar to the EU’s Euro 5 introduced in 2009 and aim to cut vehicle pollution by 40 percent. In 2008, Olympics-host Beijing was the first city in mainland China to adopt IV standards. China‘s restrictions on emissions will boost demand for catalytic convertors and their parts, especially diesel-particulate filters which use platinum-group metals.
This supply/demand imbalance will likely continue for at least several years, perhaps a decade. Prices haven’t moved all that much yet, but that doesn’t mean they won’t. Prices of commodities with a supply/demand imbalance can only stay subdued for so long before reality catches up. Either prices must rise or demand must fall.