Analysts Bullish on Palladium

Analysts Bullish on Palladium

Having gained 7.5 percent in 2012, palladium outperformed gold, which only gained 7.1 percent. In the fourth quarter, the white metal’s performance was even more impressive. With gains of 10 percent, palladium was the top performer of the precious metals complex. Many analysts predict that palladium will earn the title of top performer in 2013.

Analysts surveyed by the London Bullion Market Association (LBMA) for its 2013 forecast are overwhelmingly bullish, and a number of them believe that no other precious metal has brighter potential than palladium.

The average palladium price forecast for 2013 is $744.03, an increase of over 15 percent from the 2012 average price of $644.33.

Rising palladium demand

The outlook for palladium demand is one positive factor underlying analysts’ bullish sentiment.

Autocatalyst manufacturers are the largest consumers of palladium, and vehicle sales have increased at an average rate of 7 percent over the past three years, according to data from Scotiabank.

Economic conditions show signs of improvement in China and the US, the world’s top auto markets. With middle-class growth and urbanization expected to continue, China is projected to be a key driver for the auto industry in 2013. US sales are expected to be strong largely due to replacement vehicle demand. And in emerging markets, where incomes are rising, gains are also expected.

In addition, CPM Group analyst Rohit Savant pointed out in the LBMA report that economic growth is likely to boost demand for semiconductors.

Overall, Scotiabank forecasts that sales growth of 4 percent will drive volumes to the fourth consecutive annual record.

Palladium supply deficit likely

The supply situation is likewise being cited as a bullish factor for the palladium market as many analysts foresee a deficit this year.

Ross Norman, owner of Sharps Pixley, predicts that the shortfall will be about 450,000 ounces, while Barclays Capital expects consumption to exceed production by 511,000 ounces, the LBMA report notes. Daniel Brebner, an analyst at Deutshe Bank, said that firm expects a deficit of 900,000 ounces.

In a report released in November, Johnson Matthey warned that palladium supply is likely to fall this year.

One reason for these predictions is that South Africa, a key producing nation, has seen its mining industry plagued with problems that few expect to see rapidly resolved. These headwinds range from surging costs to unstable labor relations.

Highlighting the state of the industry was an announcement earlier this month from the world’s largest platinum producer, Anglo American Platinum (OTC Pink:AGPPY). The company said it plans to close two of its South African mines, with the likely effect being 14,000 job losses in the sector.

Russia, another key supplier, is not a likely source of supply growth either.

In addition to the problem of falling grades, producer Norilsk Nickel (MCX:GMKN,OTC Pink:NILSY) is also battling an environment in which margins are already slim, said Norman.

“There is a distinct chance that Russian metal may be withheld from the market,” he added.

That means focus is turning to the palladium market’s longtime savior, the Russian state’s stockpiles. State sales have declined over the past five years and a reversal of this trend is seen as highly unlikely.

“The likelihood of diminishing Russian stockpile exports, due to dwindling supplies, argues for higher prices and is an important component in our bullish outlook,” said HSBC analyst Jim Steel.

Morgan Stanley expects palladium supply deficits to continue until at least 2017, and foresees palladium prices hitting a record annual price in 2014.

Investment interest

Palladium was overlooked for much of 2012, but analysts are expecting investors to find the metal more attractive this year. Investment demand is therefore widely expected to be an additional source of support for the market.

Thus far, it appears that investors are living up to those expectations. Toward the end of last year, market participants began displaying the tendency to buy into price declines. TD Securities attributed this behavior to investors positioning for a structural deficit.

Since then, bullish sentiment among investors appears to have been growing. Hedge funds and large investors are reportedly the most bullish on the metal in three years. Open interest in NYMEX palladium and net speculative length have been on the rise as investors bet on price increases. ETF investors were shedding their holdings last year, but they are now returning to the market to rebuild them.

Palladium investors should be cautious, however, not to set themselves up for disappointment. Analyst projections tend to suggest that volatility is likely and that palladium’s best performance will not be seen until the latter part of 2013. That’s because current supply needs to be mopped up and demand needs to recover.

Suki Cooper noted in the LBMA report that Barclays does not believe it will be plain sailing for palladium prices given that the demand picture looks soft in the near term, with Chinese palladium imports having fallen to the lowest levels since 2009.

“Sustained growth in sales is required before demand can recover later in the year,” she added.

“Over the next 12 month, we foresee periods of price strength driving profit-taking from investors who already own palladium, limiting the rate at which the price will rise,” forecast David Jolie of Mitsui & Co. Precious Metals.

 

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

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