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Sentiment Upbeat On Palladium, Less Dubious Of Platinum: UBS

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(Kitco News) - Market sentiment toward palladium remains favorable, while the outlook toward platinum is one of an undervalued market yet with supply/demand fundamentals that may leave traders hesitant to race into bullish positions, said UBS in an early-week report.

The bank issued research notes on the mood toward both metals at the London Platinum Week gathering last week, saying “it was clear that positive sentiment towards palladium remains intact.”

Palladium topped $1,600 an ounce for the first time ever back in March. It has corrected sharply lower since, trading at $1,309 as of 9:36 a.m. EDT.

UBS said the outlook of conference participants was for palladium demand to grow in light of use in automotive catalytic converters. There were some concerns about softer car sales in China, yet many expect a recovery in the second half of the year.

“More importantly, with regards to implications for palladium demand, many expect higher PGM [platinum group metals] loadings to act as an offset,” UBS said. “Tighter emissions standards and stricter testing methods should lead to considerably higher loadings and therefore healthy palladium demand growth.”

The bank noted that once-tight supply conditions have eased since early in the year, with one-month swap rates moving closer to flat. The release of pipeline inventories at primary and secondary refineries likely contributed to improved market liquidity, the bank said. Nevertheless, market watchers are wondering how long before these supplies are consumed.

“Despite relatively easier conditions of late, the market is expected to resume its tightness up ahead as demand remains healthy,” the bank said. “Many are also watching the persistent decline in palladium ETFs [exchange-traded funds], indicating diminishing stocks that have helped bridge the gap between supply and demand in the past.”

Meanwhile, platinum has lagged far behind palladium and is trading at a discount of $502 an ounce to its sister metal. Platinum was at $807 as of 9:36 a.m. EDT.

“Market participants are increasingly convinced that platinum looks cheap here, yet fundamentals continue to inhibit the scope of turning bullish,” UBS said. “There is a sense that platinum is undervalued especially against the context of supply risks, rising prospects for substitution, and moderation in negative demand drivers.”

Supply risks in the key producing nation of South Africa include strikes as wage talks are about to begin, as well as power-supply issues, the bank said. On the demand side,
the declining market share of European diesel-powered cars – which require platinum – is abating, while the stricter emissions regulations should also help platinum.

“Our models continue to show declines in platinum automotive demand, which contributes to our estimated surplus,” UBS said. “However, for some market commentators, a better demand picture – especially given investment flows – has helped push the market much closer to balance or even into a deficit from previous estimates of a surplus. We think this is an interesting shift from a strong consensus that the platinum market is oversupplied to more mixed views this time around.”

Nevertheless, with palladium so much more expensive, there is an assumption that eventually car makers will shift toward using more platinum. The question is when and by how much, UBS said.

“Consensus appears to be for substitution to occur over at least two [to] three years once the decision is made,” UBS said. “The adoption is expected to be gradual and not all at once. Opinions on how much could be substituted vary from a range of about 100koz initially to as much as over 1moz, with much uncertainty on how exactly it is going to play out and over what time frame.”

UBS listed this bottom line view on the metal: “Although we see higher platinum prices from current levels, we expect the upside to be contained by fundamentals for now.”

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