The palladium market remains elevated on tight supply, even after dramatic volatility in February. The first half of March saw the price reaching a record high then quickly retracing by 44 per cent to a six-month low before rebounding once again at the end of March.
The shutdown of automotive production around the world in response to the COVID-19 outbreak has hit demand for platinum group metals (PGMs) including palladium. However, a government-ordered lockdown in South Africa – the world’s second-largest producer – has been extended, which could further restrict supply.
The safe-haven status of precious metals is coming up against the decline in demand for metals from industrial applications during the global pandemic, and investors are looking for indications of the direction of the palladium market in the coming weeks.
In this article, we recap the latest palladium news in spring 2020 and what the palladium price trend suggests for the market going forward.
Palladium price news in spring 2020: plunge in automotive demand prompts extreme volatility
The palladium price rallied for most of last year as increasing emissions standards have lifted consumption of the metal – which is used in catalytic converters for light-duty gasoline vehicles – particularly in China.
At the same time, demand for platinum for diesel catalysts has been falling and, as palladium is mined along with platinum and nickel, a lack of new production of those metals has prevented a rise in palladium supply to keep pace with demand. Palladium typically moves in tandem with platinum but has increasingly diverged since the end of last year, trading at a large premium.
Palladium price analysis shows that trend drove the spot price to an all-time high of $2,866 per ounce intraday on February 27, from $1,945 per ounce at the start of the year. But just two weeks later the market saw its largest one-day decline, as closures of automotive plants across Europe and North America reduced the threat of a supply shortage. Palladium fell by $460 per ounce on March 12, bottoming out at $1,601 on March 16.
News on palladium that the major PGM producers in South Africa were halting operations during the lockdown starting on March 26, to reduce the spread of COVID-19, led the market to rebound rapidly. Spot palladium rose by $628 per ounce, or 36 per cent, in two days and was trading between $2,100-2,200 per ounce in the first week of April.
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The South African producers declaring force majeure added further support to the market after Russia-based Nornickel, the world’s largest palladium producer, said on March 20 that Russian Platinum had withdrawn from a planned joint venture (JV) between the two companies to mine two PGM deposits in Russia.
Russian Platinum withdrew its support as Nornickel shareholder Rusal had not approved the cooperation. But Nornickel said it was reshaping its partnership with Russian Platinum to continue to support the projects, including negotiating a potential offtake deal for the metals produced.
The partnership should facilitate an increase in the supply of PGMs over the long term to a market “running a structural deficit” in need of additional supply to meet growing demand, Nornickel said. “In spite of the current and, we hope, temporary turbulence in the commodity markets, we maintain a very positive view on palladium fundamentals, which should remain strong in a strategic perspective,” commented Sergey Dubovitsky, vice president for strategy and strategic projects at Nornickel.
Palladium price outlook: near-term supply/demand balance remains delicate
Analysts at ABN Amro and Capital Economics expect investors to shy away from industrial precious metals like palladium in favour of gold in a risk-off environment, and the supply deficit that had been anticipated will ease in the near term because of lower demand. With COVID-19 lockdowns being extended from mid-April, it is not yet known how long it will take for automotive producers to return to full operations and that could weigh on the palladium price.
On the downside, the price could fall back towards the $1,500 per ounce mark, while further supply tightness would keep it above $2,000 per ounce.
The supply picture remains uncertain as it is unclear the extent to which production will be reduced in the coming weeks. There is a risk of supply tightening further as South Africa at the end of last week extended its lockdown, which was initially scheduled to end on April 16, until April 30. But some of the PGM producers had already applied for permission for a phased restart to operate selected facilities as essential businesses during the lockdown, which could mitigate the impact of the extension.
The palladium market is likely “to remain super volatile with availability sporadic and tight”, Scotiabank commodities strategist Nicky Shiels said in a research note last week. The initial 21-day production shutdowns in South Africa were expected to reduce palladium output by 150,000 ounces, and that is excluding a reduction in output from one of Anglo American’s smelters following an explosion last month. The facility is not expected to be fully repaired until 2021. “The risk is that further force majeures together with transportation and logistical difficulties impact the flow of material even further, which more than offsets the demand impact,” Shiels noted.
Palladium ETF and warehouse stocks were drawn down by around 140,000 ounces in March: “That's large and [a] precursor of further tightness,” Shiels wrote. Uncertainty over the level of industrial consumption could induce demand to be brought forward and tighten balances in the short term. Some US and European automotive manufacturers are looking to secure necessary supplies even while they are shut down, in anticipation of recovery later in the year.
“Any potential downside in PGMs is being curbed by arguably larger supply cuts due to SA being on lockdown, but that may change if national lockdowns are extended and auto plants remain offline for longer impacting [the] demand side (more than supply),” Shiels added.
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