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Palladium deficit expected to widen in 2020 - Johnson Matthey

Kitco News

(Kitco News) - The palladium market was in a supply/demand deficit of more than 1 million ounces in 2019, and the shortage is expected to be even worse in 2020, said Johnson Matthey Wednesday in a report on the platinum group metals.

Meanwhile, sister metal platinum was in a slight deficit last year, but may end up in a surplus in 2020 unless there is substantial investment demand for the metal, Johnson Matthey said.

Palladium prices rose sharply in 2019 and are up again in 2020. Analysts generally have cited strong auto-catalyst demand that is causing a continuing wide supply deficit.

“The palladium market deficit widened to over 1 million ounces in 2019, as combined primary and secondary supplies grew only modestly, while auto-catalyst demand surged higher on the back of new [emissions] legislation in China and more stringent testing regimes in Europe,” Johnson Matthey said.

The company said that average palladium loadings rose by 14% in gasoline-powered cars. This drove automotive demand for palladium to a record high of 9.7 million ounces, despite lower auto production in most regional car markets.

All forms of palladium demand amounted to 11.5 million ounces in 2019, up from 10.2 million in 2018, Johnson Matthey said. Mine production eased to 6.89 million ounces from 7 million, hurt by lower shipments from Russia. However, recycling climbed to 3.42 million ounces from 3.12 million.

Investment demand remained negative, although the pace of liquidations slowed considerably from the previous several years, Johnson Matthey said. Some 700,000 ounces of palladium were in exchange-traded-fund vaults at the start of 2019, down from a peak of nearly 3 million in 2015. By August, the total fell to 590,000, before some moderate ETF buying in the final quarter of 2019, leaving them at around 660,000 ounces at the end of the year, the report said.

Johnson Matthey put the “movement in stocks,” or global supply deficit, at 1.19 million ounces in 2019.

“The palladium deficit is likely to deepen in 2020, as an increasing number of Chinese and European vehicles meet China 6 and Euro 6d legislation, respectively,” Johnson Matthey said. “This is expected to drive up global average loadings on gasoline catalysts and could lift world automotive demand above 10 million ounces.”

As a result, prices are likely to remain high, Johnson Matthey said.

“There may now be some short-term potential for thrifting and substitution in the automotive industry, but this is unlikely to be enough to prevent demand from rising again in 2020, with both Europe and China expected to see further increases in average palladium loadings on gasoline cars this year,” said Johnson Matthey.

Platinum may move back into surplus in 2020

“The platinum market swung into deficit in 2019, as a resurgence in ETF buying lifted physical investment demand to a record 1.13 million ounces,” Johnson Matthey reported. “This outweighed a modest contraction in global industrial and automotive demand and a double-digit drop in the Chinese platinum jewelry market.”

The platinum investment demand grew even though no new ETFs were launched, Johnson Matthey pointed out. Many investors apparently view platinum as underpriced, as prices have been “subdued” while palladium soared, the report said.

Meanwhile, auto-catalyst demand fell 2% to 2.91 million ounces last year due to lower output of diesel cars and a delay in stricter heavy-vehicle emissions rules in China, Johnson Matthey said. There was also weakness in the Chinese jewelry sector as fabricators move toward gold instead.

Johnson Matthey put the supply deficit for 2019 at 203,000 ounces. The company estimated 2019 gross platinum demand at 8.48 million ounces, up from 7.79 million in 2018. Mine supply fell to 6.02 million ounces from 6.11 million, while recycling came in at 2.26 million, compared to 2.1 million in 2018.

“Unless investor appetites are sustained into 2020, the platinum market could move back into surplus,” Johnson Matthey said.

The company said it expects increased loadings of PGMs in heavy-duty trucks in China and India due to stricter emissions rules, but said this might be offset by further weakening of demand for jewelry in China and less buying from the glass sector.

However, mine supplies could fall below 6 million ounces for the first time in six years, Johnson Matthey said.

Rhodium seen remaining in deficit in 2020

Rhodium, a more lightly traded PGM, was in a “modest deficit” during 2019, Johnson Matthey said. The use of the metal for autocatalysts rose by nearly 15%. As was the case with palladium, rhodium prices rose sharply.

“The outlook for 2020 is for a deepening market deficit, with further strong gains expected in auto-catalyst demand, albeit at a slower rate than last year,” Johnson Matthey said.

For 2019, mined supply was 746,000 ounces, down from 757,000 in 2018. Recycling was 372,000 ounces, up from 335,000. Meanwhile, demand climbed to 1.14 million ounces from 1.04 million in 2018, leaving a market deficit of 26,000 ounces.

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