Palladium Outlook 2017: Deficit to Increase

Palladium was the best-performing precious metal last year, with prices rising more than 20 percent for its biggest annual gain in six years.
The precious metal is also on track for another year of deficit as demand from the automotive sector continues to grow and supply is tighten in South Africa and Russia.
Analysts expect prices to continue to rise in 2017, with some predicting prices as high as $800 an ounce by the end of the year.

Price Rebound

Palladium prices trended upwards in 2016, after hitting a low of almost $480 in February. The rebound happened in the second half of the year, with prices jumping up to $720 in September to finish in December at $678.
Palladium gained more than 20 percent since the beginning of 2016, outperforming other precious metals. But, the high in 2014 was over $900 and low in 2009 was less than $200 so this metal has seen a lot of volatility.
Last year, after the US election results, palladium prices rallied supported by expectations that Trump’s presidency would boost economic growth and as a result, increase automotive demand.
About 75 percent of the world’s palladium is used in autocatalysts, so sentiment was strong for the precious metal.
According to HSBC senior analyst James Steel, talking to Platts, “the platinum-palladium spread has narrowed substantially, from $375/ounce before the U.S. election. This reflects clearly tighter underlying fundamentals for palladium.”
The bank’s price forecast for this year rose to $790 from $760 while Capital Economics sees palladium rising to $800 an ounce by the end of 2017 as growth in the Chinese vehicle market slows from 2016.
For Citi Research, palladium is the fundamental favorite precious metal for 2017. The bank looks for palladium prices rising throughout the course of this year to average $715 an ounce in 2017.
“We’re positive on the platinum group metals, and we have been for some time,” said Mike Dragosits, senior commodity strategist with TD Securities. “We’re a little bit more positive on palladium than platinum.”
TDS sees palladium averaging $740 in 2017 and $790 in 2018 while Societe Generale sees the average palladium price rising to $750 in 2017.

Market Deficit Ahead

Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets, where diesel hardly features in the passenger vehicle segment. Commodity markets are reflecting hopes for increased government spending in China, the world’s biggest consumer of industrial metals.
CPM Group said that global demand for palladium in automobiles will rise nearly 3 percent to a record in 2016 on growing demand from the Asian country. In addition, lower oil prices have spurred U.S. sales of light trucks.
“There are massive shifts beginning to emerge in both the supply of and demand for platinum and palladium,” CPM said in its Platinum Group Metals Yearbook 2016.
“Automotive use of platinum and palladium is changing, shifting away from platinum toward more palladium and toward non-Platinum Group Metals (PGM) using technologies.”
In China, sales rose 9.2 percent year-on-year in the first six months of 2016, largely thanks to a government tax break. In Europe sales were up 9.4 percent year-on-year in the first half of  last year. In the US, sales rose about 1.56 percent from 2015 record high.
This could support platinum group metals’ demand and prices in the medium term, analysts noted.
Also, Johnson Matthey, the world’s largest refiner, forecast the deficit in the palladium industry to increase in 2017 from their expected 651,000 troy ounces in 2016 thanks to rising autocatalyst demand.
“With demand in industrial sectors looking set for a strong year, driven by significant capacity expansions in the Chinese chemicals industry, the palladium market looks likely to record another year of significant deficit in 2017, even if physical investment remains firmly negative,” it said.
TDS also looks for the palladium-market supply deficit to double from 600,000 ounces in 2016 to 1.2 million in the next year.
“Mine shipments of palladium are predicted to remain flat in 2017, while gross demand in consuming applications — autocatalyst, industrial and jewellery — is set to continue its upward march,” JM said.

Supply to Tighten

Palladium is mainly mined in Russia and South Africa and bought by carmakers for use in emission-controlling catalytic converters. Total Russian production in 2015 was 80,000 kilograms according to the US Geological Service while South Africa’s reached 73,0000 kilograms.
In the first half of 2016, Russia’s Norilsk Nickel, the world’s largest palladium producer, bought about 90,000 troy ounces of palladium after creating the Global Palladium Fund to develop relations with holders of existing metal stockpiles.
While in South Africa, wage negotiations and potential mine closures continue to be a bullish factor.
“Investors continue to watch wage negotiations in South Africa, which are likely to be heated and could result in strikes, as was the case in 2014,” Boris Mikanikrezai, FastMarkets analyst, said. “Any production disruptions could boost PGM sentiment and support prices,” he added.
Total palladium supply was forecast to increase 1.5 percent from 2015 to 9.01 million ounces while total demand could increase 5.7-percent to 9.8 million ounces, according to JM.

Investor Takeaway

It seems palladium started 2017 strong, outperforming other precious metals in a new year rally. Investors interested in the metal should keep an eye on the automobile industry and how demand is driven by China and US. Trump’s presidency may bring new changes to the market, but as analyst predict, palladium could be on track for another year of deficit.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.