The bullish case for palladium appears to be fading, with the metal dropping back below $700 and speculators pulling out en masse.
When gold and silver were struggling in 2014, investors increasingly turned to palladium – its fundamentals looked strong given growing Chinese demand for cars and a supply deficit that was set to widen after a five-month strike in South Africa.
The metal climbed from $696 in February to a peak of $911.50 in September and net longs on Nymex struck their highest since records began in 1986 at 30,090 contracts.
Supporting the price was a 1.4-percent fall in supply of newly refined palladium to 9 million ounces in 2014 from 2013, CPM Group noted this week. Mine production also declined while secondary supply of palladium rose, driven by increased availability of spent auto catalysts and end-of-life electronics scrap.
Palladium fabrication demand also rose for the fifth consecutive year to a record 9.02 million ounces in 2014, up 2.5 percent from 2013 levels, CPM also said.
But the metal has reversed all of its gains to trade at its lowest since September 2013 at $691 per ounce. Speculative financial investors have significantly reduced their net long positions, according to data on June 16 – net longs in palladium are now at their lowest since 2010.
As in platinum, major concerns over the extent of above-ground inventories have put a huge dampener on the bull case for palladium.
There could be as much as 26 million ounces of refined palladium in above-ground inventories, comprising around 6.5 million ounces held by the Russian government and around 12 million held in unreported inventories not in ETFs, CPM Group noted at LPPM Week in May.
As well, production is set to rise particularly following the normalisation of operations in South Africa. When combined with an increase in recycling from catalytic converters, supply will rise five percent, GFMS estimates.
Palladium is the key component in petrol-based autocatalysts; this market accounts for some 70 percent of annual demand for the metal, according to GFMS estimates.
But slowing growth in China is now a major concern – total car sales there have been declining, which reflects slowing economic growth.
According to the China Association of Automobile Manufacturers, total sales of passenger and commercial vehicles have fallen for the past three months to 1.964 million units in May from 2.079 million in April and 2.283 million in March.
While total sales are slightly up on last year’s figure so far, the downward trend must be reversed if China is to match or surpass last year’s sales peak of almost 23.5 million units.
The implementation of stricter emissions targets from Beijing may lift demand for cars by lifting scrappage rates of older cars although recycling of old catalysts will also boost palladium supply.
In the US, in contrast – the world’s second-largest automotive market – sales have been steadily increasing since 2009. On an annualised basis, domestic car and truck sales of 17.8 million units is up from 16.8 million units at this stage last year.
But there are questions about whether this rate can be sustained given the end of ultra-cheap financing deals linked to the end of quantitative easing. As well, oil prices are rising, which may curtail the rush to buy vehicles when prices hit six-year lows in January.
Still, holdings in the exchange-traded funds followed by FastMarkets have been fairly resilient, falling 113,115 ounces or 3.7 percent so far this year to 2,970,608 ounces as of June 19.
“The PGMs are faring particularly badly at the moment, with stale liquidation of old longs being seen, especially in palladium,” Marex Spectron’s David Govett said.
While he suspects both metals are close to their lows, he is sceptical about their chances for a recovery.
“The doldrums that the precious metals complex have found themselves in recently look set to continue for a while yet,” he added.
(Editing by Mark Shaw)
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