Palladium moves back above $3,000/oz, near record high

London — Both palladium base and spot prices nudged above $3,000/oz on May 5 on the back of continuing tight supply and expected improving auto demand, to move near a recent record high.

South African research firm Afriforesight said palladium spot prices have maintained their upward momentum on constrained Russian supply and expectations of strong vehicles sales later in 2021.

The palladium spot price at 1215 GMT was around $3,007/oz. It first broke above $3,000/oz on April and the record high is $3,017/oz on May 4. The metal in 2020 experienced its ninth consecutive deficit.

Johnson Matthey -- the largest secondary PGM refiner in the world -- said May 5 its palladium base price stood at an all-time high of $3,016/oz, while refiner Engelhard Materials Services (BASF) of Germany palladium base price stood at $3,020/oz.

Palladium is a key ingredient in gasoline engine auto catalysts, which lower emissions. The auto sector accounts for about 80% of industrial palladium demand.

Standard Chartered Bank precious metals analyst Suki Cooper said in a note that even though the auto market had slowed due to semi-conductor shortages, it had not lost its appetite for palladium.

"China's palladium imports remain robust, and the supply losses [from Nornickel's Oktyabrsky and Taimyrsky mines in Russia] have kept the market within a sizeable deficit," Cooper said.

Market deficit

Cooper expected the 2021 palladium market deficit in excess of 1 million oz with market tightness to concentrate in the second quarter as levels of auto production begin to stabilize following semi-conductor shortages and given Nornickel's output.

"However, supply in South Africa is starting to pick up, supported in part by work-in-progress inventory being drawn down. According to Statistics South Africa, PGM production was down 7% year on year but up 3% month on month, at its highest since August," Cooper said.

ED&F Man Capital Markets analyst Edward Meir said that according to LMC Automotive, a global provider of automotive production, sales and powertrain forecasts, auto sales in the US increased 62% year on year in March, meaning they rose 11% year on year in the first quarter.

"Higher sales in the first three months of the year came about despite lean inventories and ongoing production disruptions caused by global chip shortages," Meir said.

"Globally, LMC Automotive projects global sales of light vehicles in 2021 to increase by 12.2% year on year in 2021 to 87 million units, followed by growth of 5.5% in 2022 and 4.4% in 2023."

Attracting investors

In terms of monetary flows, analysts said palladium price movements had attracted investor interest.

"In addition to the increase in net speculative positions, palladium ETFs were also up over 8,000 oz in April, bringing year-to-date inflows to 18,840 oz. We think relatively heavier investor positioning of late could present headwinds further out, especially once supply starts ramping back up," UBS precious metals analyst Joni Teves said.

"That said, prices are likely to remain well supported around higher levels in the near term given the market remains fundamentally tight for now. This suggests potential upside risks to our expectations. Palladium forwards have eased from the levels reached in March, but remain in backwardation."

On the subject of higher price levels in the near term, further upside potential for palladium was expected to be limited, Commerzbank commodities analyst Carsten Fritsch said in a note.

"The current prices will make automotive producers think increasingly about replacing palladium with the much cheaper platinum wherever technically possible," Fritsch said.

Potential correction

With PGM prices having firmed across the complex over the recent period, Nedbank CIB mining analyst Arnold Van Graan said he remained bullish on the outlook for PGM prices, though also believed the market was due for a correction.

"PGM prices have continued to strengthen more than we had expected, reflecting a tighter market, on the back of stronger-than-expected demand, and supply and logistical constraints," Van Graan said.

"We continue to believe that current spot PGM prices are at elevated levels, and we continue to expect prices to correct if some of these constraints ease later in the year."

HSBC Chief Precious Metals analyst James Steel said palladium was looking to trade mostly in a volatile range of $2,200-$3,150/oz for the rest of 2021.

"We expect a 2021 year-end price of 2,750/oz, and a 2022 year-end price of $2,390/oz. Prices may surge to fresh highs above $3,100/oz, but look increasingly frothy despite pronounced tightness," Steel said.

"Also, we expect historically higher prices will elicit greater volumes of heretofore unquantifiable stocks onto the market. This may calm prices later this year."

ED&F's Meir said that for the month of May, palladium spot prices could range from $2,770-$3,120/oz.