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Palladium market 'overdone' but not necessarily a bubble: analyst

London — The palladium market, which hit a record high $2,835/oz on Wednesday, isn't necessarily a "bubble," Nedbank CIB mining analyst Arnold Van Graan told S&P Global Platts in an interview.

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"I think 'bubble' is a strong word. However, I think the price is a bit overdone and there could be a correction," Van Graan said. "A bubble suggests the end of the rally and going back to the doldrums that we've been in over the past 10 years."

The analyst said he doesn't see that happening for the platinum-group metals (PGM) basket.

"I think we are going correct to what is a sustainable price level. What I mean with a sustainable price level is where the PGM producers can make a decent margin and afford to recapitalize their mines," he said. "And the longer the pricing level remains high, the more likely we are to see some investment in production growth coming through."

According to Johnson Matthey's spot price, palladium over the past six months has risen more than 80% reaching $2,580/oz on January 20, though it surpassed that record on February 19 hitting $2,835/oz.

The palladium spot price, as of 1500 GMT Thursday, stood at $2,730/oz.

Affected by regulatory uncertainty, cash flows

The analyst said the PGM sector has been in a bad sate over the past decade, with the sector negatively impacted by above inflationary cost increases, regulatory uncertainty, labour unrest, electricity constraints, which are now again coming to the forefront, and a lack of cash flows.

"As a result, the sector has been undercapitalized and the ore bodies are depleted. Essentially, some mines are running out of reserves and shafts are being closed as we speak," Van Graan said.

"We therefore expect production to be constrained. And to fix that is going to require a sustainable price for at least two to three years, probably even longer."

In the near-term, the next three months or so, the analyst said he sees a pullback to a sustainable price level, which can then be maintained for a two- to five-year period.

"We've done a lot research which supports this view, and comes down to the undercapitalization of ore bodies, and mines being closed," he said. "There is no such thing as quick ounces — there's not going to be a quick supply-side response. And if you look at demand, the fundamentals are also sound."

Investors concerned about auto sales

Van Graan said many investors and market commentators are concerned about vehicle sales, but the demand side has now become more than just vehicle sales.

"You need to look at the [PGM] loadings — the amount of metal that goes into each vehicle — and that's been driven by a big regulatory push to cut down emissions. We see that as overriding the slowdown in vehicle sales," he said. "The bottom line is that the production response is not going to be there, while demand is expected to remain strong on the back of this regulatory push. That creates an environment where there is tightness in the palladium and rhodium market."

According to Johnson Matthey's rhodium spot price, between mid-August and the year-end, the metal jumped from $3,760/oz to $6,050/oz. It broke through $10,000/oz in January, surpassing the previous 2008 all-time record of $10,100/oz and edged up to $10,775/oz in the first week of February.

Rhodium set a new record, jumped 3.2% day on day, with spot price as of 1500 GMT Thursday at $12,700/oz.

"Platinum is still oversupplied, but this is where substitution comes in," Van Graan said. "Platinum could ease the palladium and rhodium shortages and balance the PGM market."

The platinum spot price, as of 1500 GMT Thursday, stood at $1,000/oz, hitting $1,016/oz on February 19, nudging over the at $1,000/oz for the first time since February 2018.