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Palladium trades nearly 30% below the record prices in February, and there are signs of improving demand for the metal, which has managed to hold a gain for the year despite economic pain brought on by the coronavirus pandemic.
Palladium, however, is still far from a bargain.
It will be difficult for “palladium to finish 2020 significantly higher than [the] low $2,000 [an ounce] area,” says Ed Egilinsky, head of alternatives at Direxion.
Higher demand “may not be strong enough alone to propel prices, and will need to be accompanied by some supply side shocks along the way,” he says.
Palladium futures PAM20, -0.07% PAU20, +1.50% have lost 27% from the record settlement of $2,711.70 on Feb. 27. The June contract finished at $1,976.60 on Wednesday, and was still trading 3.5% higher for the year.
For palladium to move considerably higher, it needs automobile sales to “dramatically pick up within North America and China,” and for supply disruptions to continue in South Africa and Russia, Egilinsky says. If there appears to be a vaccine that can actually combat COVID-19, “then the narrative of palladium moving significantly higher in 2020 becomes something more likely to play out.”
Mining operations have slowed, most recently with Impala Platinum, also known as Implats, announcing in mid-May the suspension of operations at its Marula mine in South Africa, following a cluster of COVID-19 cases.
“South African palladium supply is expected to decline further this year, owing to the impact of COVID-19 on production and mining capacity,” says Hans Ritter, global head of trading at Heraeus Precious Metals.
Ritter, however, expects palladium demand to drop more than supply this year, and says that may result in more balanced supply/demand fundamentals, after years of structural deficits.
In a recent report, Metals Focus forecast a palladium market deficit of 124,000 ounces, or 3.9 metric tons this year—a “fraction of the shortages seen in recent years and close to a balanced market,” it said.
Palladium prices may still see a return to levels “not far off” from February’s all-time high, according to Metals Focus, with prices potentially averaging $2,275 this year, up 48% year over year.
Demand for palladium, which is the metal of choice for catalytic converters in gasoline-powered vehicles, may pick up as travel preferences change.
“The same factors that fueled our love affair with the car in the 1950’s and 60’s” are back in: “personal, safe, private, immediate travel, all together as a family to hit the open road,” says R. Michael Jones, chief executive officer of Platinum Group Metals Ltd. PLG, -0.76%, a mining company focused on platinum and palladium production. Low gasoline prices add to the attraction, he says.
“Auto trends are well demonstrated in Asia that is emerging from the pandemic first,” he says. China’s car sales grew by 4.4% in April from a year earlier to 2.07 million vehicles, according to the China Association of Automobile Manufacturers.
U.S. auto sales, however, are far from a recovery. April marked the worst auto sales month in at least 30 years, down 53% year over year to an estimated 633,260 new cars and trucks sold, according to industry analysts at Edmunds, a resource for automotive information.
Looking ahead, “high unemployment and more difficult access to car loans will dampen the demand for new cars,” says Ritter of Heraeus Precious Metals.
The market is likely to see higher price volatility as local outbreaks of Covid-19 may result in disruptions in supply and demand, he says, adding that it will be difficult for palladium prices to hold steady above $2,000 an ounce.
