Palladium prices continue to soar, with spot values rising last week to $1,100 an ounce, topping the previous record high London fixing of $1,094 an ounce recorded 17 years ago on January 26, 2001. Intraday spot prices on that day also climbed briefly over $1,100 an ounce. Moreover, prices have more than doubled from recent January 2016 cyclical lows of $485 an ounce and have now moved to a $130 premium to platinum. In 2001, palladium prices rallied on supply constraints imposed by Russian provisional export quotas. Russia supplies some 40% of the world’s primary palladium stocks annually from its Norilsk mines.
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In contrast, the current rally in palladium can be ascribed to a confluence of related drivers including the sharp growth in demand from automotive manufacturing of the past several years, the further tightening of global emissions standards requiring the increased use of PGMs, continued global economic expansion, and expectations that the palladium market will remain in deficit for possibly several more years. The significant price performance has no doubt also been exacerbated by speculative investors.
While year-on-year vehicle sales growth may have slowed, total vehicle production worldwide, both passenger and commercial, is now estimated to exceed 100 million units with most manufacturing nations adopting Euro 5 equivalent or better emissions regulations (ACEA data). The total current demand of palladium for the global auto sector has surpassed total primary mine supplies in each of the past six years. Presently, auto demand for palladium is estimated at nearly 8 million ounces, well in excess of total primary mine supplies of 6.5 million ounces. It is only the addition of some 2.5 million ounces of recycled metal that limits prices from climbing exponentially (Johnson Matthey data). Nevertheless, most analysts believe that the palladium market has been in deficit for the past six years, from a time when sales from Russian stocks were ending, and will likely remain so for the foreseeable future.
But given the steady and sharp price escalation over the past 24 months, some correction may be overdue, and would, in fact, be considered healthy for the palladium market long-term. Record level values for palladium will likely elicit additional selling of metal from stocks and other speculative positions in the near-term, and along with strong rhodium prices, could result in increased recycling totals as well. It had been rumored that Russia’s state metal repository Gokhran had begun purchasing palladium when prices had weakened in 2015 and may now have a larger stockpile from which to manage market prices. At that time Norilsk had also commenced discussions to purchase more than 2 million ounces of palladium from the Russian Central Bank for investment purposes. It would be in Russia’s longer-term interest to become more proactive in controlling any erratic price appreciation in the metal and to limit the build in speculative positions.
In addition, any significant upward price moves from present levels could advance discussions by carmakers to switch back to a greater use of platinum at the expense of palladium in converter manufacture. In 2001, the premium cost of palladium to platinum rose to more than $450 an ounce, but as importantly, it highlighted carmakers’ dependence on a commodity that was derived from a very limited number of primary sources geographically. The price spike resulted in an increased use of platinum in converter manufacture for several years following the 2001 period before palladium prices reverted to a consistent discount to platinum, and palladium once again became the preferred metal in autocat production. However, given that the comparative price differential at present does not yet come close to that of 2001, the fear of a widespread substitution of platinum for palladium in converter loadings would appear premature; some
limited substitution may be possible without a complete engine redesign but perhaps not enough to be meaningful. The annual US car production of 17 million units, for example, would require an estimated 1.75 million ounces of palladium which can be sourced almost entirely from North American mine production supplemented by recycled material from US collectors. The reliability of domestic supplies for the US auto industry could supplant any concerns for a limited price premium for palladium; US mines produce far fewer amounts of platinum each year.
Also in this week’s Platinum Market Review:
-Platinum prices have gained nearly $100 an ounce (+11%) over the past month -Rhodium prices appear to have stabilized around the $1,700 an ounce level -US light vehicle sales for 2017 totaled 17.23 million units, slightly down (-1.8%)
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