By Michelle Smith–Exclusive to Palladium Investing News
Palladium was as star performer in 2010, with prices nearly doubling. Hopes were high for its performance this year and it started off on the right course. In January, benefiting from a weak dollar and supply concerns, prices hit a 10 year high of $821/oz and soared to $862 in February. But, along the way the metal’s shine has faded. At the opening of NY markets this morning, palladium was at $632.15.
Changing attitudes among investors is a 2011 palladium trend that wielded a severe blow to the market.
Following the natural disasters in Japan in March, the market shook but investors seemed prepared to brace themselves and hold on since it appeared Japanese automakers would recover faster than expected. But before solid confidence could be restored, political and economic concerns started emerging around the globe and in May investors started heading for the exit.
In August, palladium hit a month low of $722. It recovered some ground, but ended the month down $60. ETF holdings that were at a record high of 2.33m/oz in January fell to 2.14m/oz and a large sell off of NYMEX net long speculative positions was seen.
By September, the metal’s downward spiral gained momentum as it came under heavy selling pressure. Prices hit a 2011 low of $626 and the metal lost 20 percent of its value, $154.
Johnson Matthey described ETF investment as being in “starkly negative territory.” In November, holdings were reported at 1.75m/oz and net long fund positions had dropped from 16,888 contracts to 6,777, the lowest since May 2009.
Gross palladium demand is expected to be down in 2011, but the decline is not attributed to softening fabrication demand. Though economic uncertainty is blamed for casting the current shadow over the palladium market, industrial demand, including that for autocatalysts, is expected to see growth this year. The contraction is attributed to declines in investment and jewelry demand.
Going into 2012
Yet, at the ETF Securities Precious Metals Conference earlier this month, speakers expressed optimism about the outlook for palladium. Among them was Anton Berlin, Director of Marketing for Norilsk Nickel (OTC PINK:NILSY), who foresees not only price increases in 2012 but also a supply deficit.
A November Scotia Mocotta forecast said that of all of the PGMs, they are most bullish for palladium over the long term and therefore believe that price weakness will lead to another good long term investment opportunity in the year ahead.
There are a number of fundamentals supporting a positive palladium outlook. To begin with, the metal’s use in autocatalysts, which consumes 60 percent of supply, is essentially mandated into place. The largest auto markets, China and the US, are gasoline dominant and therefore palladium intensive. A number of emerging countries, such as India and Brazil, where auto sales growth is expected provide further support for demand. And, in Europe, though diesel vehicles are most popular, there is a growing trend of substituting palladium for platinum where possible due to the cost advantage.
Stricter off-road emissions legislation went into effect this year, which is expected to prompt some demand growth. There are also numerous other applications for which palladium is used, such as Blu-ray discs and chemicals.
Berlin described the use of PGMS as “sustainable and inelastic” adding that “if you try to replace these metals in many applications the process will not go the way you want it to go.”
That palladium is a comparatively cheap member of the PGM family bids well for its use and reduces risks of it being substituted.
Furthermore, there is the issue of supply. Berlin estimates mined palladium will only increase about 2 percent next year. The Cash for Clunkers programs of 2009-10 in the US and China, which helped to boost recycled supply, won’t be there.
In 2010, supply from mining and recycling, was about 8.14m/oz. However, gross demand was about 9.63m/oz. The deficit was largely reduced by 1m/oz from the Russian stockpile.
Both Russian stockpile sales and investment demand are likely to be critical pieces of the palladium 2012 outlook puzzle.
No one knows how much palladium remains in that stockpile, but Berlin points out that an official from the Russian Ministry of Finance said 2011 was the last year of significant sales from that source. He pointed out that sales have already declined from that those 5 years and any further reduction could push the market into deficit next year.
Tight supply and rising costs for miners are expected to help boost prices. If the current economic uncertainty pans out positively, investment demand could return, which lending more support to the bullish outlooks.
So how good is next year expected to be?
Berlin said forecasting prices is like knowing the difference between climate and weather. Next summer, yes, he knows it will be sunny, but ask the temperature on July 17 and he isn’t so sure.
I, Michelle Smith, do not hold any equity interests in the companies mentioned in this article.