PALLADIUM TODAY: New price highs

Apr 6, 2017 - 9:09 AM GMT
by
Short Term:
Medium Term:
Long Term:
Resistances:
R1 573 Dec 2015 high
R2 635 Apr 2016 high
R3 682 50% Fibo 2014>2016 drop ($911-452)
R4 711 200 DMA
R5 724-729 Former spike lows
R6 727 Oct 3, 2016 high
R7 735 61.8% Fibo 2014>2016 drop ($911-452)
R8 747 Aug 10 high
R9 785 20 DMA
R10 776.50 Dec 1 high
R11 797 Jan 24, 2017 high
R12 798-833 Resistance band Sep 2014-May 2015
R13 803 May 2015 high
R14 815 YTD high
Support:
S1 785 20 DMA
S2 779 40 DMA
S3 751 100 DMA
S4 735 61.8% Fibo 2014>2016 drop ($911-452)
S5 724-27 Aug-Oct high/late-Nov support
S6 723 UTL of Jan/Feb 2016 lows
S7 682 50% Fibo 2014>2016 drop ($911-452)
S8 635 Apr 2016 high
S9 611 61.8% Fibo Jun>Aug rally
S10 499 DTL from Sep 2014
S11 452 2016 low
Stochastics:Turning lower
Legend:BB – Bollinger band
DMA – daily moving average
Fibo – Fibonacci retracement level
MACD – moving average convergence divergence
U/DTL – up/downtrend line

Technical Comment

Analysis

  • Palladium reached a fresh two-year high at $816 per oz on Wednesday April 5 but it continues to meet stiff overhead resistance, most probably from pent-up scrap supply.
  • The market continues to work through overhead pressure between $797 and $833 per oz, which capped prices between September 2014 and May 2015.
  • Clearance would target resistance at $848-863 from February-August 2011.
  • Immediate support is seen from the 20, 40 and 55 DMAs, which are between $781 and $773.
  • Further support is expected around the mid-March lows around $740 per oz and should be reinforced by UTL support from early 2016 at $723 and the 200 DMA at $709.

Macro factors

Palladium also set new highs in rand terms yesterday. Rand-denominated palladium has surged by 16% since mid-March; the South African currency has slumped amid fresh political in-fighting and after ratings agency Standard & Poor’s downgraded the nation’s rating to junk status. This could compound long-term headwinds facing producers in the country.

Net length among Nymex speculators increased by 12,367 contracts or 13% in the week to March 28. Net length of 20,532 contracts is up 6,346 contracts or 45% in the year to date. Last week’s increase was driven by a 2,695-contract increase in open longs, offsetting a 598-contract rise in open shorts. Speculative longs remain elevated while short exposure remains low, suggesting palladium is vulnerable to long liquidation or from wider re-engagement by shorts.

Global vehicle sales growth was strong last year, supporting rising demand for emission control devices. Passenger vehicle sales in the three largest markets (the USA, China and the EU) increased 8.5% in 2016 to 56.5 million vehicles. But we believe sales will grow far more modestly in 2017; sales in China are forecast to climb a further 5% in 2017 to 29.4 million vehicles while sales in Europe are forecast to grow only 1% due to political and economic uncertainties. Passenger vehicle sales in China increased 6.3% in January-February and by 6.2% year-on-year in Europe. Sales in the USA contracted by 1.5% year-on-year in the first quarter.

ETF holdings stand at 1.558 million oz compared with a recent low of 1.522 million oz. Given their price sensitivity, we are surprised strong rand-palladium prices have not triggered long liquidation from investors in the country, suggesting they have become less bearish.

Palladium’s fundamentals will continue to improve – fallout from Volkswagen’s Dieselgate scandal will lead to a shift away from diesel-powered vehicles in Europe. Carmaker Renault has suggested diesels could disappear from most of its European car range. Palladium is starting to be used more in diesel auto-catalysts also.

Nornickel – the world’s largest palladium producer – reported that palladium output from its own Russian feed totalled 609,000oz in the fourth quarter of 2016, down 1% quarter-on-quarter. Full-year output from the company’s own Russian feed totalled 2.518 million oz, slightly above forecast but down 2% year-on-year due to lower ore grades and the reconfiguration of downstream production. Nornickel has an output guidance of 2.63-2.73 million oz for 2017.

Johnson Matthey forecasts another year of substantial deficit in the global palladium market in 2017, with demand set to continue to outstrip growth in supply despite rising supply from recycling. This will build on the 651,000-oz deficit in 2016 forecast by Johnson Matthey. It sees total supply rising 1% to 9.03 million oz – a near-10% increase in recycling volumes will offset static mine production. Palladium demand from the auto-catalyst sector will increase 2% to 7.8 million oz, fuelled by growth in sales of petrol-powered cars.

Conclusion

Our outlook for palladium remains little changed. Robust fundamentals and strong speculative buying are buoying prices but gains are being kept in check by stiff resistance. This is most likely to be from pent-up scrap material but the strength in rand-denominated palladium prices will also give a boost to producers in the country. We feel there is an increasing danger of speculative investors becoming despondent unless palladium can vault the $798-833 per oz resistance band and push to new highs.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.