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After a rough year in 2011, palladium has started 2012 on an upward trend. The metal has surpassed and maintained a position above $700 an ounce. But is palladium really upward bound for the long term?
By Michelle Smith — Exclusive to Palladium Investing News
Palladium has been on an upward trend in 2012. This month, 
palladium not only managed to close above $700, which hasn’t happened since September 2011, but it has surpassed that mark and reached an early morning high of $713 at 9:30 am (EST) in New York. So, should we call it a comeback?
If the prices we’ve seen thus far are an indication, the new year is a new chapter for palladium. The metal tends to respond to economic data, and in that regard 2012 opened with some encouragement.
Europe’s manufacturing figures exceeded expectations and the world seemed to keep spinning despite the region’s looming crisis. US jobs statistics beat analysts’ forecasts and China’s purchasing managers’ index expanded. Investors took kindly to these positive indicators, which may have painted a brighter economic picture than had been presented to them prior to the new year.
Palladium closed up nearly 4 percent at $660 on January 3.
Palladium production
Palladium supply concerns have also proven positive for prices. Last month Eskom, South Africa’s largest power provider, asked consumers to avoid wasting electricity because the company was concerned about its ability to meet demand. Though negative European data was starting to weigh on the market, palladium’s appeal returned following the announcement.
Then, Norilsk Nickel‘s (OTC Pink:NILSY) CEO reportedly said he expected the company to reduce production due to a slight fall in global metal demand. Intensifying supply concerns, palladium closed the week of January 20 at $678.
Norilsk Nickel’s production was already down year-on-year with the 2.8 million ounces produced in 2011 being a 2 percent drop. The company said the decline was attributed to all of its production sites and added declining production into its 2012 outlook. Given its expectations of 2.6-2.65 million ounces from Russia and 95,000-100,000 ounces from Norilsk’s other international sites, the company said it will produce 2.75 million ounces at best.
To aggravate matters, South African producers are struggling with production too. Anglo American, (OTC Pink:AAUKY, LSE:AAL) saw a 22 percent drop in palladium production in Q4 2011 compared to Q4 2010. The industry is being pummeled by safety stoppages and strikes, which are making the business of pulling the metal out of the ground increasingly difficult.
Auto demand
Strong auto sales helped lift palladium markets last month.
In 2011, there was a 10 percent rise in US car and light truck sales, a surge not seen since the 1980s. Furthermore, there were strong sales of larger vehicles, whose emissions systems are loaded with more metal. China’s auto sales were up 2.5 percent, the slowest growth in a decade. But in such a large market it is still a significant number.
Vehicle sales in 2012 are projected to increase from 72 million to 77 million units, and the US and China are expected to account for significant portions of those sales. Since both are gasoline-dominant markets, their exhaust systems are palladium intensive.
Barclay’s Capital projects the auto industry will use 6.22 million ounces in autocatalysts this year.
A sustainable rally?
The Federal Reserve gave palladium a boost by announcing that it would continue to hold interest rates low. As the dollar suffered, palladium rode higher to end the final week of January at $691. February prices have maintained their position above $700 thus far.
In the second half of 2011, investors showed a distaste for physically backed palladium ETFs and net long speculative contracts. However, both investments have seen increases this year.
With good supply and demand fundamentals for the metal, and investment demand returning, will investors and strong prices stick around?
Bloomberg reported that the estimates of 28 analysts forecast a median average price of $882.50 for palladium this year.
A Reuters poll of 28 analysts conducted in July 2011 also indicated at strong year with a median forecast of $868. However, Reuters now says that analysts have scaled back their expectations and expect prices to struggle. Their updated responses result in an average price of $725, lower than 2011′s average price of $748.
A-1 Specialized Services & Supplies publishes a platinum review three times a year. Its January 2012 report points to a pattern that suggests palladium’s performance may be seasonal.
In the early months of the year, the metal attracts fresh investments, and there is increased interest from commercial counterparts, which may have the benefit of new budgets and improving production projections, the report says.
Those commercial counterparts are largely automakers and tend to do a lot of purchasing early on, explained A-1′s Patrick Magilligan.
If we look at the past five or six years, he says, we have seen prices rise in the first half of the year and then trail off later.
Securities Disclosure: I, Michelle Smith, hold no investment interest in the companies mentioned.