FOCUS – Palladium hits 13-mth high on supply concerns, could reach $1,000 – UBS

Mar 5, 2014 - 1:29 PM GMT
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London 05/03/2014 – Palladium was holding at its highest since April 1 early on Wednesday afternoon on potential Russian supply concerns that pushed the precious metal higher this morning.

Coupled with continuing strikes over pay in South Africa, this has helped re-energise the market, which had been losing steam and weighed down by stale longs, UBS said in a note on Wednesday.

The metal peaked at $781 and was at $775/780 per ounce, up $14 on Tuesday’s close.

The price burst stems from potential Russian supply concerns, in particular if trade sanctions are imposed on Russia in response to its military intervention in Ukraine. If so, palladium primary supply could be severely affected given that Russia as the largest producer accounts for 41 percent of global supply, UBS pointed out.

Global markets steadied on Tuesday after Russian President Vladimir Putin said he saw no need to use military force in Ukraine’s Crimea region for now.

But talk of sanctions from the West is creating uncertainty – the current price of palladium undervalues the metal and a price closer is $1,000 is more appropriate if sanctions are introduced, UBS said.

Trade sanctions amount to an extreme reaction and are no means a certainty, it added, stating that any signs of a resolution could prompt a swift unwinding of recent palladium longs.

“Sanctions could cause further damage to economic activity both in Russia and the West, so this option is likely to be considered with much care,” UBS said.

Additionally, if the situation in Ukraine escalates into military conflict, it could act as a tripwire to global risk assets – a tide of risk aversion “rarely bodes well for palladium”, the bank pointed out

Pressure to liquidate existing Russian government stockpiles of palladium to raise finance ahead of any sanctions could intensify if the situation escalates, it also said.

(Editing by Mark Shaw)