Can the Palladium Price Rally Last?

Palladium prices continue to rise higher after gaining over 50 percent in 2017. But Metals Focus notes that the “immediate outlook appears a little uncertain.”
The metal is used in vehicle autocatalysts, and its rise has been fueled primarily by robust car sales and tightening emissions regulations across a number of key markets.
Palladium fell into a physical deficit of 336,000 ounces in 2012, and that widened to a record high of 1.6 million ounces in 2017. Metals Focus expects the market to remain in deficit for at least the next four years.

However, the precious metal‘s future depends largely on vehicle sales in China and the US, the world’s two key car markets. According to Reuters, last year the US saw its first drop in auto sales since the financial crisis; meanwhile, China saw slower car sales growth after cutting tax breaks on some vehicles.
This slowdown has so far been offset by a move away from diesel engines in Europe, which generally use platinum in their autocatalysts. But as mentioned, some market watchers are now worried that automakers could begin substituting palladium for platinum, which is currently less expensive.
Other experts are less concerned. For example, autocatalyst manufacturer Johnson Matthey (LSE:JMAT) estimates that it will take at least two years before substitution begins to impact palladium demand.
Increased recycling is also a potential issue. High palladium prices could incentivize recycling, which is expected to reach a record level of 2 million ounces in 2019; that could slightly reduce the existing physical deficit and reduce market tightness. As of Wednesday (January 17), palladium was at $1,117.30 per ounce, down from a record $1,138 earlier in the week.
Metals Focus adds that the metal has benefited from its strong positive correlation to US equities, but it “expect[s] this year to see a stock market correction, which could in turn trigger palladium liquidations.” Nevertheless, the firm notes, “[e]ven so, we expect that any palladium price correction will be short-lived, as investors will eventually see the dip as a buying opportunity and return to the metal.”
Electric vehicles, which don’t use autocatalysts, are a potential threat to palladium demand as well. It’s estimated that gas– and diesel-powered vehicles will make up less than half of new car sales by 2031.
All factors considered, it’s difficult to say where palladium prices may be headed in the future. For now, the precious metal continues to fly, and investors are enjoying the ride.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.