So what’s going on with Palladium? Looking back at history, all major metals hit an intermediate peak in the first half of 2008, followed by an intermediate bottom in late 2008, most moving to new highs into 2011. Palladium’s ability to maintain its strength, achieving a new high in Sep14, separates it form the herd. Gold, Silver, Copper, and Platinum have each been in correction mode for the last four years.
A look into Palladium’s supply/demand situation reveals a view of concentrated supply with geopolitical risk, reduced inventories, and growing demand. The following global balance is presented courtesy of Johnson Matthey (all volumes are in metric tonnes).
Nearly 80% of Palladium mined production is sourced from South Africa and Russia. To date, US and European sanctions related to the Ukraine situation have avoided action on Palladium exports from Russia. It is also widely held in the industry that Russia has nearly exhausted its above ground Palladium inventories.
Demand is largely driven by growing automobile catalyst requirements which are influenced by a) emerging market automobile demand, and b) increasing emissions regulations. Ford Motor Company pioneered the use of Palladium in catalytic converters over 20 years back, creating a substitute for Platinum. Auto manufacturers are increasingly favoring Palladium, especially in the Chinese market.
A special thanks to Johnson Matthey for including a recycling component to the numbers. In 2013, recycled Palladium met over 25% of global demand.
The strength in Palladium appears to be fundamentally and geopolitically backed. Key drivers include the potential for restrictions on Russian exports and continued growth in global automotive demand.
From a technical perspective, the pullback from $912/oz in Sep14 to $729.95/oz in Oct14 has relieved the overbought condition. The $730 level now becomes critical support.
Murphy & Co’s position model focuses on commodity and equity futures markets, and does not currently recommend positions in Palladium. To learn more about Murphy & Co’s position models, visit http://murphycofutures.com/position-models/