Palladium Outlook 2022: Auto Demand to Determine Price Movement

Palladium Investing
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What's ahead for palladium? Read on to find out about the 2022 palladium outlook.

Click here to read the previous palladium outlook.

Palladium prices entered 2021 elevated by supply issues from the previous year, a factor that was further compounded by a resurgence in automotive demand amid historically low inventories.

Tailwinds pushed prices from US$2,336 per ounce in January to an all-time high of US$2,842 at the end of April.

While lingering supply chain disruptions benefited the platinum-group metal during the first half of last year, values for the autocatalyst metal were pushed lower during H2.

“The rise in palladium prices in the first half of (2021) was predominantly due to expectations of supply tightness amid strengthening global economic activity and anticipation of a surge in palladium demand from the auto sector,” Steven Burke, economist at FocusEconomics, told the Investing News Network (INN).

“Prices peaked in early May, in tandem with global manufacturing PMIs, and have since trended lower — hitting the lowest level since early 2020 in recent weeks,” he added.

2021 palladium price performance

2021 palladium price performance.

Chart via Kitco.

By the end of September, palladium prices had sunk to a year-to-date low of US$1,786. The metal, which had started Q3 at US$2,740, had shed 34 percent by the end of the quarter. At the end of December, palladium was still holding in the US$1,800 range, although it was some 21 percent lower than its January value.

 Palladium trends 2021: Supply surplus drags price lower

Optimism around economic recovery paired with a 2020 production curtailment at Anglo American Platinum’s (LSE:AAL,OTC Pink:AGPPF) South African operations aided in palladium’s H1 2021 price positivity.

As the semiconductor shortage stretched into the year, the palladium market, which had been in a supply deficit, swung into a surplus for the first time since 2010, according to Metals Focus consultant Dale Munro.

“Russia contributes around 40 percent of primary palladium mine supply,” he said via email. “Thus, the two major incidents at Nornickel (MCX:GMKN) in early 2020 — a concentrator building collapse and mine flooding — had a major impact on global supply, estimated to be around 400,000 ounces of production lost for the year.”

Residual supply issues out of Russia weren’t enough to offset rising production out of South Africa as Anglo American Platinum processed stockpiled ore.

“280,000 ounces of semi-finished inventory accumulated as a result of the Anglo converter plant shutdown in 2020, boosted country output,” Munro said. “In general, across all regions, mine operations were successful at navigating the COVID pandemic challenges with only marginal direct impact on production volumes.”

As South African miners upped output, they also benefited from higher prices early in the year. “Meanwhile, the high basket price, particularly from increased rhodium prices, pushed margins up and allowed miners operational flexibility to pursue higher-cost production,” Munro said. “This was particularly relevant in South Africa.”

With supply growing, prices were impacted by softening demand throughout H2 2021, particularly in the automotive industry. “The biggest factor that impacted palladium demand this year is the protracted and deepening chip shortage,” said Wilma Swarts, director of platinum-group metals at Metals Focus, in December. “Vehicle production forecasts for 2021 were cut by around 10 million vehicles from the start of the year until now.”

For his part, Ralph Aldis, portfolio manager at US Global Investors (NASDAQ:GROW), told INN that palladium's H2 decline was largely facilitated by reports of its substitution in the automotive industry.

“We've seen some stories where the auto industry is beginning the substitution process, and that is what's helping platinum a little bit, but it's coming at the expense of the palladium price,” he said.

Ironically, palladium became the automotive metal of choice to reduce emissions in catalytic converters when platinum prices trended into the US$1,000 per ounce range in the early 2000s. Now the industry is pivoting back to platinum after prices for palladium neared US$3,000 in April 2021.

Due to its close ties to the automotive sector, palladium also faced headwinds from the global semiconductor shortage, which has impeded growth across numerous sectors.

“The palladium prices drifted lower also on the back of auto demand being curtailed because of the chip shortage,” Aldis added. “So that was a knock-on effect for palladium there.”

Palladium outlook 2022: Chip shortage fueling uncertainty

It is estimated that the semiconductor shortage cost the global auto sector US$210 billion in lost revenue in 2021 as producers cut output by 13 percent.

“The ongoing semiconductor shortage has hammered auto production, and in turn demand for palladium, which has weighed on prices,” Burke of FocusEconomics explained to INN. “Given that the shortage of chips is expected to linger into (2022), demand for palladium from the auto sector should only rise at a modest pace (this year) — after declining markedly in 2021.”

While 2022 is expected to bring some relief in terms of the chip shortage, Burke noted that the auto sector sits near the bottom of the list in terms of importance to chip manufacturers.

“Without increased global capacity levels, the market will remain extremely tight and keep auto production relatively downbeat,” he said. “A major issue for securing semiconductors in the auto sector at the moment is linked to low margins for suppliers. Chip makers’ profit margins for supplying semiconductors to the auto industry are extremely low in comparison to other sectors and make up a small fraction of revenue, which makes them less attractive for suppliers to produce in the best of times.”

As a result, the chip issue is expected to be “a headache for automakers for the foreseeable future,” as further supply headwinds pose additional downside risks for the auto sector, and thus demand for palladium.

Metals Focus is a bit more optimistic, forecasting an uptick in both auto demand and production in 2022.

“From a demand perspective we are expecting a recovery in vehicle production, which will lift demand,” Swarts said. “However, the revised light-duty production forecast for 2022 is still well below the production forecast previously anticipated, and will accordingly still weigh on demand from the automotive sector.”

Palladium outlook 2022: Volatility to weigh on price growth 

By the end of December 2021, palladium prices had declined by 32 percent from July’s value of US$2,724. Prices for the metal continued to hold in the US$1,850 to US$1,900 range at the start of 2022.

Although vehicle manufacturing is anticipated to remain below pre-pandemic levels in 2022, Metals Focus is calling for palladium values to rise to a quarterly average of US$2,300 by Q4.

According to Munro, the move will likely be triggered by the replenishing of inventories, which will consume a majority of the surplus material. 2022’s forecast surplus could also be smaller than expected, as he pointed out.

“(2022’s) palladium mine supply is expected to increase on growth from Russia as Nornickel returns to full production,” he said. “Q1 is a seasonally weak quarter for South Africa due to the holiday season; however, annual output is expected to be broadly flat for the full year.”

The Metals Focus consultant continued, “Strong basket pricing is facilitating increased sustaining capital expenditure, which should help bring production stability. The ramp up of development projects is required to offset declining volumes from mature operations; these volumes are inherently more risked, so there is potential for some guidance misses.”

In the years ahead, new production will be key in meeting sector demand. For US Global Investors’ Aldis, this means looking to Australia — specifically, Chalice Mining (ASX:CHN,OTCQB:CGMLF), which Aldis noted has made a significant platinum, palladium, cobalt and nickel discovery at its Julimar project in Western Australia.

As South African operations age and Russian miners deal with issues around melting permafrost destabilizing infrastructure, these new discoveries will become more important in meeting future demand.

“You're going to have other sources of palladium to choose from in the future other than South Africa and Russia," said Aldis, also pointing to North American producers. “You've got several companies that are in that space actively trying to add more production or find a deposit that can be monetized somewhat.”

Echoing the forecast of Metals Focus, FocusEconomics is calling for palladium to average US$2,300 in 2022, a US$134 decline from 2021’s estimate of US$2,434.

“Substitution of palladium for platinum should outweigh substitution of rhodium for palladium,” Burke commented to INN. “Moreover, tepid demand from the auto sector and electric vehicles’ rising global share of automobile sales should weigh on palladium prices.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

The Conversation (3)
Rajarshi Bhatt
18 Jan, 2019
Since the demand for Palladium is high , irrespective of high price compared compared to Platinum in 2018 ,; its supply and Russian deficit in Palladium mineral, it calls for further research before forecasting its trend in 2019 ?
Investor Last Name
14 Dec, 2017
Won't auto makers switch back to Platinum, for gasoline catalytic converts. The auto makers switched from Platinum to Palladium because it was cheaper. But now that Platinum is much cheaper I think it's just a matter of time before they switch back and the spread between the two metals comes back in. Am I wrong in this assumption?
Investor Last Name
14 Dec, 2017
Won't auto makers switch back to Platinum, for gasoline catalytic converts. The auto makers switched from Platinum to Palladium because it was cheaper. But now that Platinum is much cheaper I think it's just a matter of time before they switch back and the spread between the two metals comes back in. Am I wrong in this assumption?


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