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When will the Palladium Rally Resume Following its Recent Correction?

Despite the recent fall in palladium prices, Charles De Meester, founding partner of Metals Focus, one of the world’s leading precious metals consultancies, remains positive about palladium prices.

After rallying to an all-time high of $1,615 on 21st March, palladium suffered a steep correction. Within a week, it lost some $270 or 17% before finding support in the mid-$1,300s. Thereafter, palladium saw a partial recovery but the white metal has since struggled to hold much above the recent low.

In addition to profit taking, poor car sales data in China and the US have clearly weighed on investor sentiment regarding palladium. Palladium’s recent weakness can also be attributed to less marked supply tightness. This is evidenced by a fall in indicative leasing rates (Bloomberg bid), which dropped to low single digits in March (a level last seen in October 2018).

Indeed, it is important to note that palladium’s rally through to mid-March was far more fuelled by genuine market tightness than speculative forces. Evidence for this bias to real world conditions can be found in speculative longs having remained restrained; net managed money longs on 19th March on Nymex amounted to just 1.3Moz and so down slightly on the end-2018 figure, let alone the record 2.8Moz seen in early 2018. This in turn also helps to explain limited profit taking from those players over the last couple of weeks, with net longs falling just below 1Moz by 9th April.

Furthermore, redemptions in palladium ETPs have been modest; as we write, total palladium holdings were down by 47koz or 6% from the end-2018 figure. This reflects the already low level of holdings, as heavy outflows over 2015-18 left global holdings at decade-lows at the start of 2019.

Despite the recent fall, we remain positive about palladium prices. Even the ytd price fall can be taken as less brutal if reviewed in chronological terms; the April low was only a two month low and so a pause for breath was perhaps needed before the rally reignites. More importantly, palladium still enjoys robust supply/demand fundamentals. Even with the sluggish performance of both the Chinese and US auto markets in early 2019, autocatalyst demand will almost certainly rise this year, due to higher vehicle sales elsewhere and tightening emissions legislation (which is raising PGM loadings). Despite conjecture over future substitution from palladium to platinum, we are not aware of any solid plans to effect this, even in the medium term. In addition, even though palladium total supply remains expected to rise 4% this year, that cannot explain recent price weakness as, if anything, the risk of greater supply disruption in South Africa has grown.

As these supply gains will not be sufficient to outstrip total demand, the palladium market will remain in deficit for the eighth year in a row. From the start of this decade, the cumulative deficit by end-2019 is expected to surpass 5Moz. This in turn means that above-ground stocks will have fallen by almost 29% over that period. With above-ground palladium stocks forecast to slip below 13Moz before end-2019, these inventories are equivalent to roughly 14 months of fabrication demand, compared to 24 months at end-2010.

As a result of these fundamentals and speculative investors’ limited exposure, we see little scope for a marked correction in palladium prices from current levels in the coming months. While there is room for a further pull-back, this would not be expected to last long as “bargain” hunting quickly emerges. That said, we could also see a period of more rangebound conditions persist, particularly if advance purchasing by Chinese end-users in recent years means there is little appetite to raise inventories at a time when the local car industry is struggling.

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