While the mainstream business news has been obsessing about the recent highs in the stock market, and while gold bugs have been lamenting about the flat performance of gold, a lesser known commodity has been manifesting excellent gains as well as stability over the past few months.  That commodity is platinum’s little sister, palladium.  Yesterday, palladium traded as high as $755, its strongest level since September 2011.

Pamp Suisse Palladium Bar 10 Ounce

Pamp Suisse Palladium Bar 10 Ounce

“The fundamentals of the market have always been pretty solid and have gained the attention of investors/speculators as of late,” said Robin Bhar, metals analyst with Societe Generale.

The supply-demand equation for palladium is the tightest of all the precious metals and top analysts such as Bhar and Bart Melek, a head commodities trader with TD Securities, believe this trend will continue into the foreseeable future.  Said Bhar, “I’m very positive on the metal.  I think this is just the beginning…  On an annual basis, we expect palladium to be one of the best performing metals, if not the best performing commodity.”

Over the last quarter, palladium has gained 10%, contrasted with retreats in platinum, gold, silver, and commodities in general.  The Standard & Poor’s GSCI Index of 24 raw materials declined 2.9% over the same period.  Treasuries were down also, nearly .01%.  The forces driving palladium’s recent rise hit both sides of the supply-demand paradigm.

On the supply side there are two principle factors involving the world’s two largest exporting countries, South Africa and Russia.  Nearly 80% of all the palladium in the world is mined in these two countries.

The extended mining strikes that have hit South African mines full force last summer continue and have spilled over into the palladium sector, cutting into production.  This labor dispute has been intense and with casualties, and analysts predict no quick solution on the immediate horizon.  Furthermore, Anglo-American Platinum, the world’s largest primary producer of platinum, earlier this month proposed cutting back some output of platinum group metals so as to improve its profitability.  Analysts believe that this could result in well over 100,000 fewer ounces of palladium being available in the marketplace.

The situation in Russia, which accounts for 43% of the world’s palladium mining, is much more grim.  Last Friday, Johnson Matthey announced that Russian palladium inventory had dropped 68% in 2012, to 250,000, down from 775,000 ounces in 2011.   Peter Duncan, General Manager of Market Research at Johnson Matthey, told reporters that Russian may be only able to supply 90,000 to 100,000 troy ounces this year.  Said Duncan, “Russian state stockpiles have been dwindling and are now pretty much exhausted.”

On the demand side, several forces are propelling palladium’s recent appreciation.  The US Commodities Futures Trading Commission (CFTC) shows that hedge funds and other large speculators have almost tripled their wagers on higher prices since the beginning of November.  Their long positions are at their highest since the end of 2009.  This renewed investment interest should be bullish for 2013.

In addition, worldwide auto sales moved up nicely in 2012.  Why this is important is that palladium, rhodium, or platinum are utilized in all catalytic converters.  Johnson Matthey estimates that, of the total world palladium consumption of 9.725 million ounces for 2012, 6.84 million ounces – over two-thirds – was used for catalytic converters.  The record car sales of 2012 should extend palladium’s shortages.  Global car sales in 2012 exceeded 80 million for the first time ever and are predicted to increase to about 83 million this year.  LMC Automotive, a research company in England, predicts that Americans will buy more for a fourth consecutive year, equaling the longest run increases since the 1940s.

China’s demand for autos continues to surge as well.  China’s economy rebounded from a slump in 2012 and along with it, the demand for autos by its ever growing middle and upper classes.  Chinese sales figures for passenger vehicles in November were the highest in almost two years, the Chinese Association of Automobile Manufacturers reported last month.  That agency is also calling for another 10% increase in 2013.  All in all, palladium consumption will beat production by an estimated 500,000 ounces plus in 2013, about what the worldwide car industry devours every seven weeks, according to Barclays.  This trend in palladium demand and consumption is forecast by Morgan Stanley to extend to 2017.

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  1. Jeff says:

    “large speculators have almost tripled their wagers on higher prices since the beginning of November. Their long positions are at their highest since the end of 2009″. This is anything but bullish (actually scary)……secondly, because car sales moved up in 2012 (actually they ended the yr with a pathetic stall) means little going forward. The problem with these forecasts is everyone uses a straight ruler. That’s why almost all so called economic forecasts are wrong. But then again, the truth is rarely reported…… To believe demand will grow ignores the state of all the major world economies……. The supply /demand balance is priced in……What is not priced in is a futher drop in the dollar and future inflation. In that scenario any hard asset (oil, gold, palladium, ect) will shine……

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