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Why palladium is getting creamed

Commentaries & Views

Palladium is oversold and a good buy, said Precious Metals Commodity Management in a report released last week.

The study, which was authored by Matt Watson, weighs the factors pushing palladium prices higher and lower.

The metal was crushed this month dropping 33% from its February highs. Terrible auto sales out of China due to the spread of COVID-19 is the chief cause.

"Clearly the most damage to the 2020 demand forecast is the impact from the global virus pandemic," wrote Watson. "Looking specifically at China, the worlds largest auto market, you can see the bottom fall out of this market in February."

Watson noted that auto sales in China posted their biggest monthly fall in February, tumbling 79% as the coronavirus outbreak devastated demand.

There was also news that researchers are making progress on finding a substitute for costly palladium in catalytic converters. BASF announced a new tri-metal catalyst, developed in collaboration with and sponsored by Sibanye-Stillwater and Impala Platinum. This enables partial substitution of palladium with platinum, enabling a reduction in catalytic converter costs and partially alleviating sustained palladium deficits.

The two factors pushing palladium prices higher are an explosion at Amplats and power disruption at Eskom. Earlier this month, Amplats announced it will drop 1 million ounces of production off its 2020 guidance due to an explosion at its smelter. The second factor is Eskom, South Africa's power utility. Power disruptions are supposed to carry through 2020, which will pinch PGM production in PGM-rich South Africa.

All taken together, Watson sees an imbalance, but not a big one.

"Auto catalyst demand at the beginning of the year (Initial) versus new China vehicle market under modeled 2020 recovery shows a decline in absolute palladium demand of 456 koz. Unfortunately, Anglo American will reduce supply by 300 koz, leaving a net 156 koz net demand reduction. Whoopie.

"The 2020 projected structural deficit will be slightly lower. Honestly, it doesn’t matter. The price will continue to rise once sanity returns and rollups of market impact are fully modeled.

"I will add that clients of mine are staging forward buys of platinum, palladium and rhodium. Frankly, why not? Rhodium is even more profound of a structural deficit in percentage terms. Both palladium and rhodium above ground stocks continue their decline.”

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