Will Palladium Reign Supreme Again?

Precious metals analyst Sanjiv Arole examines the market forces that are driving palladium’s fortunes.

Although palladium was classified as a precious metal only in 2009, it became the most expensive precious metal in 2019. Palladium has topped $2,300 per ounce (against platinum’s all-time of $2,273 per ounce in 2008) on umpteen occasions. In fact, palladium topped $3,000 per ounce for the first time on 4th May, 2021.

The Ukraine war too triggered off a rally in palladium as it scaled a fresh all-time high of $3,440.7 per ounce (intra-day) on 7th March, 2022. Although gold managed to be at par with palladium on a few occasions this year, palladium still remains the most expensive of (non)precious metals in the precious metals basket.

The palladium price has gained by over 6% to $2,018 per ounce on 2nd September, 2022 as compared to $1,893 per ounce at the beginning of the year. It was the only precious metal to have gained as of 2nd September this year, while the rest of the precious metals all showed a decline in price as compared to the beginning of the year.

Gold fell by 5.78% to $1.712.50 per ounce while silver decline sharply by 27.34% to $17.92 per ounce, platinum too slipped by 16.07% to $840 per ounce.

As Russia accounts for a substantial portion of palladium supplies in the world, the Ukraine war will continue to have an impact on the palladium price in the remainder of the year as well.

The crowning glory for palladium in the immediate aftermath of the Ukraine war was when its price scaled an all-time high of $3,440.7 per ounce on 7th March, 2022. In sharp contrast, the palladium prices dipped by a whopping 80% to $1,854 per ounce on 20th July, 2022.

Gold’s decline from its peak of $2,039 per ounce for the year was more subdued at around 20% as gold slumped to $1,694 per ounce on 1st September, 2022. Silver and platinum too declined, by over 47% and 38%, respectively, from their highest to their lowest levels. However, as far as year-to-date prices were concerned, palladium was the only one that remained in positive territory. If one were to look at the average prices, then all the precious metals showed a decline in the average price year-to-date as compared to the average price for the previous year. Gold declined by just over 1%, while palladium fell by 14%. Silver and platinum fell steeply by 23% and 21%, respectively. Overall, it once again supported the view that when the price surges, gold climbs the slowest, while palladium and silver lead the way. But, when prices fall, gold is the steadiest, while palladium and silver are the hardest hit. Platinum is usually between gold and the other high-flyers.

Coming to the fundamentals of palladium as per the Johnson & Matthey PGM Market Report 2022. Some of the salient features for 2021 are:

(a) Russia is the largest primary palladium supplier accounting for around 40% of mined production. In 2021, Russian mine production was 2,689 thousand ounces.

(b) In 2021, palladium prices scaled $3,000 per ounce on liquidity concerns following the flooding of mines in Siberia. However, increased supplies from South Africa saw the price slump to below $1,600 per ounce in December.

(c) High prices incentivised scrap yards to expedite reprocessing palladium-rich catalysts. Secondary supplies increased as a result of the backlog of auto scrap as well. However, as the price declined so did the scrap inflows.

The outlook for 2022:

(a) The Ukraine war has resulted in uncertainty over shipments from Russia in 2022. In fact, J&M has not made any forecasts for palladium supplies from Russia. Then, South African supplies are set to fall in the current year due to plant maintenance, etc.

(b) Expected weaker car sales to hit recycling of vehicles, less vehicles for scrapping.

(c) Any recovery in auto PGM demand likely to hit due to supply constraints and Covid-19 restrictions, particularly zero-Covid tolerance in China and the resultant lockdowns there.

(d) Industrial palladium demand to be hit due to high prices.

(e) Since Russia is the largest palladium supplier in the world, supply disruption from Russia could give rise to inflation and depress growth. This would be further accentuated with palladium ingots from Russian refineries being unacceptable as ‘good delivery’ bars in London and elsewhere from April 2022.

(f) Average platinum content of a gasoline car in 2022 is forecast to rise by over 66.6% compared to 2021. Automakers in Europe and North America are set to begin fitting tri-metal catalysts in greater numbers, reflection substitution efforts to replace palladium with platinum. Even China is expected to ramp up substitution. Overall, a tumultuous time for PGM metals, particularly palladium

Meanwhile, US Fed Chief Jerome Powell’s speech at Jackson Hole symposium sent chills across global stock markets as well as commodity markets. The symposium was held from 25th August, 2022 and Powell’s comments on inflation were far more hawkish than anticipated. His overwhelming focus on inflation was reflected in the usage of the word inflation around 44 times in his speech.

Powell stated that all his efforts would be centred on bringing inflation down to 2% from the current 9%, implying that higher than normal interest hikes would continue till inflation numbers slide down. He added that while higher interest rates, slower growth and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. They are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean greater pain.

Jerome Powell appears to be on the verge of throwing caution to the winds in his relentless pursuit of taming inflation. He seems to be oblivious of the lower GDP growth, higher debt servicing of long-term debt weighing down on the US economy, trade sanctions, Covid-19 hovering around, and the likely harsh winter for most of Europe due to fuel shortages as a backlash against sanctions by Russia and above all the Ukraine war.

In his endeavour he has embarked on a path of rapid rise in interest rates to tame inflation. In the game of brinkmanship, he is risking job losses and lower growth giving way to even recession. While higher interest rates could encourage savings account holders, it could hurt the stock markets as well as the precious metals market.

Gold, in particular, would wait with bated breath to see the outcome of the monetary policy statement later in the week. If the Fed continues it hawkish trend (a further substantial hike as in July), then gold could be under enormous pressure of a strong dollar as well as an option for savings in banks accounts. Thereby, gold could sink further along with the rest of precious metals.

A recovery in the gold price could be seen only when it transpires that inflation cannot be tamed despite the rate hikes or the Fed end the rate hikes citing victory over inflation.

Will palladium still remain in positive territory even if the Fed continues to hike interest rates? As they say, ‘the proof in the pudding is in the eating’. Wait and watch!

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