INVESTORS ARE SHAKING IN THEIR BOOTS FOR PALLADIUM

FINANCIAL MARKET ANALYSIS

Unlike gold and silver, which are mainly regarded as precious metals by investors, palladium is sensitive to the manufacturing cycle. 84% of world production is used by the automotive industry (see Fig. 2) in catalytic converters to reduce the toxicity of exhaust gases emitted by internal combustion engines. Outside the automotive sector, palladium has significant uses in electronics, chemicals, and jewellery. It is used to produce multilayer ceramic capacitors, which are used in computers and smartphones, for example. This application takes advantage of palladium's unique properties, notably its electrical conductivity and resistance to corrosion. In jewellery, palladium is appreciated for its naturally white colour and lightness, although it is often considered too soft compared with platinum, which limits its use. World palladium production is concentrated in a few countries, led by Russia and South Africa (see Fig. 3). This predominance makes supply highly dependent on geopolitical disturbances in these regions.

‍

‍

‍

The global palladium market has long been characterised by an imbalance in its favour, between strong demand and limited supply. This production shortfall enabled the price of the metal to rise to an all-time high of $3,442 an ounce in March 2022.

‍

‍

Over the last two years, the price of palladium has been plummeting. It recently stood at 854 dollars (see Fig. 4), a contraction of -75%. There are four main reasons for this spectacular fall. Firstly, demand for catalytic converters is contracting as electric vehicles gain market share. Secondly, palladium inventories are at high levels. Thirdly, advances in the recycling process are enabling more palladium to be recovered, reducing reliance on the extraction of new resources. Fourthly, part of the residual production of catalytic converters has been achieved by replacing palladium with platinum.

‍

In relative terms, an ounce of palladium is now trading at 0.47 ounce of gold, in line with its historical median (see Fig. 5). The price of palladium could therefore fall further, as it did in 1995, 2008 and 2011, but it is approaching areas where a trend reversal would not be surprising.

‍

Against this downward trend, several factors are likely to encourage a rally in the palladium price:

• Any delay in the deployment of electric vehicles, and therefore any additional demand for combustion engine and hybrid vehicles, would boost demand for palladium.

• With the price of palladium very low, manufacturers of catalytic converters who had sought to replace it with platinum could be back.

• Technological developments and innovation, such as the use of palladium in fuel cells to produce clean energy, could be a new growth driver for palladium.

• On the supply side, any increase in geopolitical tensions in Russia or strikes in South Africa would restrict global supplies of palladium.

• The performance of precious metals is strongly influenced by movements in the US dollar. In recent years, the strength of the greenback has penalised precious metals, and palladium has been no exception. Any fall in the dollar when the US Federal Reserve lowers its key interest rates would provide mechanical support for palladium.

‍

‍

• From a technical analysis angle, the trend for palladium remains bearish, but the $930 level could act as resistance (see Fig. 6). Market operators could take advantage of this threshold to start buying.

• In the options market, there is a large accumulation of short positions (see Fig. 7). With the market saturated with a negative outlook, the possibility of a short squeeze increases. Such a scenario occurs when short sellers are forced to cover their positions quickly because of an unexpected rise in prices, thereby accentuating the upward pressure.

‍

‍

Of the major non-Russian listed companies, Anglo American Platinum (AMS SJ) enjoys a dominant position (see Fig. 8). This may enable it to influence global supply and, ultimately, palladium prices. Among the other companies that play an important role in palladium mining and production, Impala Platinum (IMP SJ), Sibanye-Stillwater (SSW SJ) and Northam Platinum (NPH SJ) are also based in South Africa.

‍

Conclusion:

The share prices of mining companies are so closely correlated with the price of palladium that any rebound in the commodity's price would instantly trigger a surge on the markets (see Chart of the Week & Fig. 9).

‍

RETURN ON FINANCIAL ASSETS