PALLADIUM MARKET PRICE - IS $1,600 SUSTAINABLE?
POSTED BY ALICE
For the second time this year, Palladium recently broke through the $1,600/oz mark, following the price hitting a record high of almost $1,615 earlier this year – almost double the low of $834/oz in August last year, exceeding our predictions.
This proved, once again, to be a short term breakthrough, although many now believe that palladium will consolidate its price above $1,600/oz before too long. Metals Focus, one of the leading precious metals consultancies, is one that believes this will occur, despite the fact that there are a few dynamics that might suggest otherwise.
The most important factor is the trend we are now seeing for automotive sales in the light vehicle (LV) gasoline markets in China, North America, and Europe. These three regions are alone expected to account for 70% of the global Palladium automotive requirement over the course of this year, and all three are experiencing declining sales.
In the Chinese LV market, sales in June dropped by over 9% year on year to 2.0M units, the 12th consecutive monthly fall. However, the rate of decline seems to be easing – earlier in the year, declines in excess of 10% have been recorded – partly due to car dealers offered steep discounts to clear stocks of models that do not meet the latest emissions standards.
In the US, LV sales in June fell by 2.4% year on year to 1.5M vehicles, primarily as a result of a modest decline in sales of SUVs for the first time since the end of 2013, according to leading automotive-focused forecasting and market intelligence services provider, LMC Automotive. So far, in the first half of this year, sales in USA are down 2.1% from January – June 2018.
In Western Europe, June sales showed a fall of 8% year on year, although this was exacerbated by there being fewer selling days in 2019 – a like for like picture shows a 2.2% decline. Furthermore, this decline is likely to be offset by market share gains for TV gasoline vehicles at the expense of their diesel competitors, with the latter’s share falling to 33% in May from the January figure of 35% (based on provisional figures released by LMC). Although this doesn’t appear particularly disastrous, it should be remembered that at the start of 2018, diesel’s share was at 40%.
Although car sales across all the major markets remain sluggish, the impact of more stringent environmental legislation, especially in China, where the State 6 standard (roughly aligned to Euro 6) is increasingly being adopted, is likely to see a rise in demand for Palladium, with some experts predicting a new record high this year of 8.6M oz.
From the “supply” perspective, wage negotiations in the South African Platinum mining industry began a few weeks ago, with AMCU, a key union, demanding a 48% increase in the minimum wage. Currently, discussions are in their infancy, but many remember the five-month-long strike by AMCU members at Sibanye-Stillwater’s gold operations that only ended in April this year…and it should be borne in mind that any potential industrial action will impact more on Palladium than on Platinum, given the former’s better dynamics of supply and demand. However, with the current high stock levels of Palladium, any supply disruptions will not affect supply for a while, at least.
Consequently, expectations are that Palladium will register another physical decline in 2019, by approximately 570K oz, lower than the 821K oz seen in 2018, but nevertheless the eighth uninterrupted deficit in the precious metal’s market. Thus, above-ground inventories are likely to decline to 12.9M oz by the end of 2019. (Compare this to the position at the end of 2010, when above-ground stocks were 17.7M oz). This equates to a fall in cover to meet demand from approximately 2 years in 2010 to only 14 months cover this year.
With such strong market conditions, it is also little wonder that professional investors are showing more interest in the metal, with data released on 9th July showing that Palladium was the only precious metal to see a rise in net managed money long positions. Even so, Palladium’s net long of 1.4 M oz is still 48% below the reported highs achieved in January 2018, when the price was $1,102. This suggests there remains considerable potential for growth in the Palladium positioning, and this, coupled with the ongoing strength in its market fundamentals, underpins the bullish expectations in Palladium’s price, which is predicted to sustain a price in excess of $1,600 later this year and continue to set new highs thereafter.