Palladium Price Update: H1 2020 in Review

Click here to read the latest palladium price update.

After starting the year on solid footing, palladium’s bull run came to an end in March as coronavirus closures impacted the automotive sector, the metal’s primary end-use segment.

But despite slipping from a record high back to levels seen in November of last year, the palladium price is still elevated, holding above US$1,900 per ounce.

The metal plummeted 41 percent in March, when market participants reacted to COVID-19 with massive liquidations. Since then, palladium has climbed 23 percent on the back of sector and market volatility.

Palladium price update: Q1 in review

The year started with palladium holding steady above US$1,960. By the end of the first trading week of 2020, it had climbed above US$2,000 for the first time. Tensions between Iran and the US surrounding a drone assault on controversial Iranian general Qassem Soleimani benefited the precious metals broadly as investors moved away from oil.

January and half of February saw the metal add 32 percent as it kept pace with its upward trajectory.

Palladium soared to an all-time high in mid-February, when prices went north of US$2,614. The metal’s sustained increase was a key topic during a March interview with Randy Smallwood, CEO of Wheaton Precious Metals (TSX:WPM,NYSE:WPM).

“With the shift away from diesel engines, palladium is outperforming and outperforming very strongly. And we don’t see an end to it, there’s nothing that’s going to come in,” he said.

“These are real shortages that are impacting the automobile industry in terms of being able to find enough palladium to satisfy the needs — the increased needs — for the catalysts on the gasoline side.”

Randy Smallwood: We Don't See an End to Palladium's Outperformanceyoutu.be

Watch the entire interview with Smallwood above.

Smallwood added, “We just don’t see any change in supply. There’s just a definite deficit in terms of commodity out there, and there’s nothing that’s going to change in the next while.”

Unfortunately, no one predicted how severely COVID-19 would impact the market.

As mentioned, palladium’s momentum took a hit when coronavirus lockdown efforts caused the price to swan dive, resulting in palladium shedding some 40 percent.

But within a week the metal had displayed a speedy recovery, edging back to the US$2,000 threshold.

As March and the first quarter drew to a close the price held; however, headwinds were building as lockdowns began closing countries.

Palladium price update: Q2 in review

Palladium’s rally ended on March 27, the same day South Africa entered a country-wide lockdown. The African nation’s role as key producer of platinum-group metals (PGMs) makes both the platinum and palladium markets sensitive to political and social dynamics in the region.

As Rohit Savant of CPM Group explained, the country accounts for 72 percent of global platinum mine supply and 36 percent for palladium.

“The first half of 2020 saw PGM supply decline sharply,” he said. “Palladium was hurt relatively less than platinum because palladium mine supply is more diversified than that of platinum. While there were mine supply disruptions at various PGM-mining locations, South Africa was particularly badly hit.”

The auto industry accounts for 80 percent of end-use demand in the palladium space; because the sector is very globalized, pandemic curtailment efforts weighed heavily on output.

As Savant explained, “While supply declined sharply, fabrication demand for these metals declined even more sharply, which weighed on the prices of these metals during the first half.”

Fabrication is anticipated to be one of the hardest-hit end-use segments for palladium, with demand in that area seen falling 15 percent year-over-year. 2020 is expected to bring the lowest amount of palladium demand from the fabrication sector since 2011.

While March was full of volatility, April saw the largest month-over-month price decrease, when the catalyst metal closed at US$1,899. April also saw palladium reach its quarterly high, US$2,070, before falling 8.2 percent.

The metal’s decline wasn’t over there. By May 6, the price was sitting at US$1,712 — that’s 12.6 percent lower than January and a 34 percent decrease from the year-to-date high US$2,614.

For June, the metal briefly breached US$2,000. However, for the majority of the month palladium was locked in the US$1,900 range and ended the month at US$1,873.

Palladium price update: What’s next?

Looking ahead, CPM Group’s Savant expects more price pressure.

“Palladium prices are likely to continue facing headwinds going forward, (but) while the market remains tight in the short term (that) will prevent any sharp decline in prices in the near term,” he said.

The precious metals analyst went on to note that the price could slip over the medium to long term.

“Prices could fall as mine supply rises — as miners focus on developing palladium-rich orebodies in response to the sharp run up in palladium prices in recent years — and (as) fabrication is faced with the reintroduction of three-way catalysts in gasoline engines.”

Three-way catalysts use as combination of platinum, palladium and rhodium, resulting in some lost market share for palladium in the gasoline autocatalyst sector.

An early June report from the World Platinum Investment Council outlines efforts from BASF (ETR:BAS) to substitute high-priced palladium with platinum. The company has successfully subbed out the more expensive metal in light-duty gasoline vehicles without compromising emissions standards.

“This follows confirmation earlier this year from Johnson Matthey (LSE:JMAT,OTC Pink:JMPLF), which produces a third of all car autocatalysts globally, that platinum could be replacing palladium in ‘underfloor’ catalyst units in gasoline cars by February 2021,” reads the report.

While substitution will be a formidable issue for palladium, Savant sees price recovery in the near term.

“Expect demand to recover, but there will be strong headwinds,” he said. “There is still a lot of uncertainty because of the virus, US elections and Brexit. These uncertainties will dampen demand, but demand should improve relative to the first half of this year.”

This sentiment was echoed by the Calandra Report’s Thom Calandra, who said prices should recover and hit US$3,000.

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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.