Palladium could be set for a near-term bull run on growing vehicle sales in the US and China as well as supply-side difficulties.
Spot palladium has performed well in recent trading sessions even while gold has declined, FastMarkets analyst William Adams said, but it remains oversold given the strength of its fundamentals and growing demand for vehicles, in which palladium is crucial in catalytic converters in petrol-driven cars.
The metal was last toying with $750 – at $757/763 per ounce, it was down $25 on Tuesday’s close but up from $716 at the start of the year. Still, it remains far off the August peak of $911.50.
“While gold is under pressure, palladium may struggle to attract follow-through buying,” Adams said. “If gold stabilises, I think palladium will be where gains will be seen.”
He is bullish on the near-term outlook for palladium, seeing a double bottom in place on the metal’s technical charts.
Palladium fell nearly $200 to an October low of $729 from its August high despite strong world vehicle sales demand and chronic labour and power issues with South African producers before rebounding.
“This recovery confirms that despite the $170 washout in palladium between September and October, investors remain positive on the metal and are keen to rebuild positions at these lower levels. The preference for palladium is evident,” UBS’ Edel Tully said in a note.
China’s estimated sales of more than 20 million cars so far this year is close to a record for the country, helped by the rapid rate of urbanisation in the country, which is predicted by the UN to be around 77 percent of China by 2025. Its population will be around 1.4 billion by 2030.
In May this year, the Chinese government announced plans to take off the road by the end of 2014 some six million cars that fail to meet emission standards, driving up the demand for new vehicles and therefore for palladium for autocatalysts.
As well, Beijing’s “National IV” emissions standards, introduced in June, are more stringent than the previous iteration, capping carbon monoxide emissions for petrol-driven cars at 2.29 grams per kilometre and nitrogen oxide emissions at 0.082 grams per kilometre.
Vehicle sales have eased slightly in recent months – the pace of year-on-year growth was above 10 percent earlier in 2014 – but demand from developing economies remains a key factor for the metal.
Sales in the US, also predominantly a petrol-based vehicle market, are also robust, with 16.46 million vehicles sold on a seasonally adjusted annualized rate (SAAR) basis to October and 2014 likely to be its best year for automobile sales since 2007.
Light vehicle sales in the US in October totalled 1.281 million units, an increase of 2.8 percent on the September total and up 6.1 percent in year-on-year terms.
Lower gasoline prices – down 20 percent since the end of June and below $3 per gallon for the first time in nearly four years, the American Automobile Association (AAA) says – are making car purchases more attractive.
Crude oil prices hit have their lowest levels in four years – light sweet crude (WTI) oil futures on the Nymex are now firmly below the $80 per barrel level after starting the year at $98, while Brent is around $84 per barrel, down from $110 at the beginning of 2014.
And with the end of quantitative easing in the US and probable increases in interest rates from next year, consumers will be looking to make purchases prior before ultra-cheap financing deals are taken off the table.
On the other hand, supply-side issues and a deepening deficit in PGMs are also supporting prices.
Supply this year had already been hit by the five-month strike in South Africa by the country’s platinum miners that ended in June.
In September, Standard Bank estimated that 530,000 ounces of palladium production was lost due to the strikes and predicted the global market for the metal will remain in deficit until at least 2016. It pegged the global palladium deficit at 1.65 million ounces this year, 1.43 million ounces in 2015 and 1.88 million ounces in 2016, even as production in South Africa returns to capacity.
As well, South African power producer Eskom is struggling to keep the power on, threatening the output of many of the country’s miners.
Norilsk’s approach to Russia’s central bank to buy up to $2 billion of its palladium to guarantee the supply of the metal to its customers during the years of shortfall, if approved, would alleviate fundamental tightness in the near-to-mid-term.
It also suggests that earlier reports that the state’s stocks of the metal were close to exhaustion were wide of the mark – but would not address the underlying issue of slower supply growth relative to demand.
Norilsk’s production currently accounts for around 40 percent of the global palladium market.
(Editing by Mark Shaw)