Palladium Sees Extreme Loss of Support

2011 ended with investors largely disinterested in palladium, but with the new year came new attitudes, notably a renewed appetite for risk. For many, the US economy appeared to be on the road to recovery. The intensity of the EU crisis had simmered down in January and there was even encouraging manufacturing data from the region.

Boosting confidence even further was the expanding Purchasing Managers Index (PMI) in China, a nation with a large, gasoline-dominant auto industry. In addition, concerns about supply were triggered by disappointing results from South African miners and a strike at Impala Platinum (LSE:IPLA). Given those seemingly positive conditions, palladium started 2012 with upward momentum.

Palladium in Q1

Palladium started the year up 4 percent at $660, reached a month high of $696, and closed January with a $58 gain. A rise in the net speculative length of NYMEX contracts and inflows to ETFs showed a marked risk-on vibe.

Forecasts for rising US vehicle sales materialized and Impala’s labor dispute ballooned into the mass firing of over 17,000 workers, providing sources of support for palladium’s upward momentum. The metal passed $700 in early February, a level not seen since September 2011. After some mid-month volatility, palladium prices rose further to $721.

In March, data showed that US vehicle sales had held up since the previous month. Yet palladium came under pressure from several directions.

Announcements of a resolution at Impala eliminated those supply concerns. As that happened, concerns about demand were setting in.

Data showed that China’s passenger car sales had fallen to their lowest levels since 2005, and it appeared that manufacturing in the nation was declining. Palladium imports for February reportedly fell to their lowest levels since 2009.

Gold and platinum prices also came under pressure in March. Together, the negative developments sapped the momentum out of the palladium market and no new highs were achieved. But during Q1 2012, palladium clearly benefited from the revived risk appetite. Over 100,000 ounces were added to NYMEX net speculative length, and palladium holdings in ETFs rose to their highest levels since October 2011.

Palladium in Q2

Positive vehicle sales data from the US, China, and Korea provided support for palladium in April. Weakness in platinum and gold continued tugging at palladium and there was some volatility, but the month closed with the metal up $32.

As those gains were being made, investors’ appetite for risk was rapidly deteriorating. Palladium prices started May at $679, but began declining and did not recover. There were strong concerns about industrial demand. There were also reasons to be concerned about supply as the prices of platinum group metals (PGMs) had fallen to levels that appeared to threaten some South African miners. The net speculative length of palladium futures sharply declined and investments in ETFs were reduced to a trickle. Palladium fell below $600 for the first time in 2012.

Palladium managed to show some strength in June, reaching $636 mid-month. From there it was mostly in decline. Overall gloomy economic conditions were aggravated by data showing about two months’ volume of unsold vehicles in China.

Palladium fell to a month low of $568 on June 29. Investors were clearly in a de-risking mode, and industrial assets, including palladium, were on the liquidation list. June was the only month in H1 2012 that saw net outflows from palladium ETFs. The month ended with palladium down $34.

However, Q2 ended with palladium ETFs attracting $32 million in fresh assets in comparison to net outflows of $80 million from platinum ETFs. Throughout H1, palladium often showed more resilience than platinum, which highlights the metals’ different demand sources. Despite pessimism about the Eurozone, which heavily weighed on platinum, major gasoline-dominant auto markets appeared to be holding up, and they provided support for palladium.

Palladium to rebound?

Palladium prices now appear to be too low, especially given that platinum prices are also weak.

In Q1, Standard Bank predicted that palladium prices above $700 would be unsustainable due to a lack of adequate demand. But the bank also noted that $600 is too low a price for palladium.

Palladium’s average price in July was $581.

Though strong concerns about the economic conditions in China and the US have emerged and are helping to sustain a lack of confidence in demand, there are supply issues that investors should be following.

At the end of June, Commerzbank reported that Swiss exports of palladium had risen while Swiss imports of PGMs from South Africa had fallen. Switzerland serves as a trading hub and the firm identified this imbalance as an indication of supply problems.

The most recent Swiss trade statistics bode well for demand for PGMs, Commerzbank said.

Platinum miners in South Africa have been struggling for quite some time with multiple issues, such as safety stoppages and labor disputes, which negatively impact production. Now, an environment with weak prices and rising costs is threatening their livelihood. Some mines have already closed and the sustainability for some others is in question. More mine closures may occur before an upside price correction occurs, but if the palladium market does not find a basis for such increases, the fundamentals of supply and demand are expected to force them to do so.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.