Of all the precious metals of interest to investors,
palladium may be the one to watch going into the second half of
Palladiums supply and demand fundamentals are bullish
for the metals price, with a widely predicted supply
deficit starting this year and deepening by next. Meanwhile,
demand is rising.
Still, you would never have guessed that based on its recent
performance. Currently, the price isnt far off its lows.
The problem to date is that in a risk on
environment, palladium, which is used largely in automobile
catalytic converters, has been getting shorted aggressively,
especially by the hedge funds, says Wiktor Bielski, the
London-based global head of commodities research at VTB
Capital, the Russian investment bank. To understand why
palladium has traded down despite the strength in the auto
market, you have to keep an eye on the long versus short
statistics released every Friday by the U.S. Commodity Futures
Trading Commission, Bielski says, noting that all of the
industrial metals are trading like risk assets right now. With
palladium, I have to say that anybody playing the short
side has done very well, he says. But, Bielski insists,
you cant fight the fundamentals forever.
After hitting a year-to-date high of 71.51 on February 22,
ETFS Physical Palladium Shares (PALL), the only U.S.-listed ETF
backed by physical palladium, closed on July 9 at 57.48, a
decline of 19.6 percent. At this level, PALL isnt far
from its 52-week low of 52.90, and its well off its
52-week high of 83.90.
Is there a lot of mileage left in shorting palladium?
Probably not, says Bielski. The risk/reward
is clearly skewed more to the upside. He predicts that as
a result of the way palladium has been beaten down by the
shorts, the stronger and more sustained the rally will be
when it comes. Just when that will occur, he says,
is just impossible to predict at this point, unless you
have a line into Ms. Merkel and the euro zone
One of the leading reasons why a number of fundamental
commodity analysts like Bielski are strongly positive on
palladium is that Russia has announced that 2012 will be the
last year for sales from its Cold Warera stockpiles. Back
then, Russia was mining nickel aggressively to build military
equipment, and it ended up with lots of palladium as a
by-product. Up until now, Russia has been the second-largest
producer of palladium (behind South Africa), with over 46
percent of global annual production, according to research from
ETF Securities of London, PALLs sponsor.
Bielski cautions that the Russians havent said their
stockpiles are depleted; they have said that they will
stop exporting from their stockpiles. No one knows
how much, if any, palladium is left in those stockpiles,
because the Russians have never released any data, he says.
But, he adds, Theyve clearly run down their
stockpiles very substantially. And he notes that
its possible to do educated guesswork based on the mining
of nickel by Moscow-based Norilsk Nickel, the worlds
largest producer of nickel and palladium.
Johnson Matthey, a London-based precious metals refiner
known for its accurate forecasts, has estimated that the
Russian government will release 250,000 ounces of palladium
into the market this year, down from 750,000 ounces in 2011.
The firm also cites Norilsk Nickels guidance that it
expects to be producing slightly less in the way of newly mined
palladium this year, in the range of 2.6 million to 2.65
million ounces, down from 2.81 million ounces last year.
As result, Bielski is projecting that the global supply of
palladium will fall short of demand by between 500,000 to
600,000 ounces in 2012 and by 800,000 ounces in 2013, in a
total market of 7.5 million ounces.
In South Africa, palladium is a by-product of platinum.
South Africa produces 60 percent of the worlds platinum,
and at the moment, there are some issues in South Africa,
as the low price levels of platinum and palladium are pushing
producers to shut down production that is uneconomical,
says ETF Securities analyst Simona Gambarini in an email. She
notes that Aquarius Platinum announced the closure of its
Marikana mine for late June, and with two other mines suffering
problems with labor strikes this year, South African PGM
[Platinum Group Metal] mine production was down 30 percent in
the first four months of 2012, compared to the first four
months of 2011, contributing to a tightening in supply.
Matthey notes that while new production of platinum from
South Africas mines has fallen, releases of metal from
inventories meant that total shipments from South Africa of
platinum rose by 5 percent to 4.86 million ounces last year,
and with a ramping up of mined output in North America
following shutdowns in 2010, and new and expanding operations
in Zimbabwe coming on-stream, the company expects platinum to
be in a surplus again this year. That will keep the price in a
range of $1,450 to $1,750 per ounce in the next six months,
averaging $1,600, the firm says, in its 2012 forecast on
platinum and palladium issued on May 14. As of July 9, the firm
was posting a base price of $1,446 per ounce on its web site,
slightly under that range. However, Johnson Matthey also
believes the market for palladium will swing back into deficit
this year, and that positive fundamentals are likely to support
a price range of $620 to $800 per ounce and an average of
around $715 in the next six months. On July 9, the firms
posted base price for palladium was well under that, at $582
In that 2012 forecast, Johnson Matthey also notes that this
years projected deficit of palladium would be in stark
contrast to 2011s surplus. The big reason for last
years surplus, it says, was ETFs. The funds had been big
buyers in 2010 but turned negative in 2011, returning 565,000
ounces to the market. Gross demand for palladium as a result
fell by 13 percent last year to 8.45 million ounces, the report
says. While both palladium and platinum are used for catalytic
converters, which control auto emissions, platinum is used more
for diesel cars, which represent half of the European market,
whereas palladium is used more for smaller, more fuel-efficient
Gambarini of ETF Securities notes that the Chinese
governments recently approved stimulus package includes a
subsidy aimed at encouraging rural residents to trade their old
vehicles for new, more fuel-efficient models. Since the
autocatalyst market in China is almost entirely dominated by
palladium, this is particularly positive for
palladium, she says. Auto sales in China have been
strong, with the sale of passenger vehicles rising 16.6 percent
year-over-year as of May. And auto sales have also been strong
in the U.S., where palladium also dominates, she notes.
Still, Gambarini is somewhat cautious. She says she is
overall positive about the fundamentals of palladium over
platinum, but both are likely to be weighed down by
the slowdown in global growth in the short term.