(Kitco News) After reaching new record highs this year, palladium prices have a positive trajectory as the precious metal will remain in deficit for the next two years, according to Capital Economics.
The demand is estimated to improve while the supply remains muted, pushing prices higher from current trading levels, said Capital Economics commodities economist Edward Gardner.
Palladium's path for the next two years is to climb from $2,000 to $2,500 an ounce by the end of 2024, Gardner said in a report this week.
"Palladium prices should remain historically high through 2023-24, as usable stocks continue to dwindle," he wrote. "We forecast palladium demand to pick up slightly over the next two years, while supply growth is set to remain muted, keeping the market in a deficit throughout. Continued drawdowns of stocks over that period therefore make it likely that prices, already historically high, will rise even further."
Palladium demand is yet to return to its pre-pandemic levels, which is what the next two years will be about, especially when it comes to the use of palladium in the autocatalysts of internal combustion engine (ICE) vehicles. The precious metal is widely used in catalytic converters by the car industry. Electric vehicles do not require autocatalysts.
"We forecast autocatalyst-related demand to rise by the most in China, partly because we see economic growth there recovering from recent lows, even if it remains historically subdued," Gardner noted. "What's more, car ownership is still low in China compared to developed economies, so even though electric vehicles (EVs) make up a growing share of new vehicle purchases in China, there is still plenty of margin for additional ICE vehicle purchases."
Palladium's mine supply is looking to be subdued, with most of the large palladium miners publishing downbeat production guidance for 2022.
"We forecast a 3-4% fall in supply from South African mines, which account for about 2/5 of global supply from mines," Gardner said. "The mined supply story for this year is similar in other countries, although we do forecast a small rise in output in Russia, not least because Nornickel, which dominates the supply of palladium from mines there, reported 8% year-on-year output growth in the first half of this year."
However, in 2023 and 2024, supply from mines outside of Russia should start recovering very slowly, Gardner added.
Recycled supply will account for an increasing share of the total supply. "Used car prices are currently high. This will only incentivize ICE vehicle owners … to switch over to increasingly-compelling electric vehicles. As this switch gathers pace, more and more recycled palladium from autocatalysts will come onto the market," Gardner described.
Overall, Capital Economics projected the palladium market to remain in a small deficit into 2024.
Palladium has been very volatile this year, with spot prices reaching a new record high of nearly $3,000 an ounce back in March. Prices surged on fears that sanctions against Russia following its invasion of Ukraine would cut supply from a major producer.
Since then, $100 daily price moves have been a regular occurrence in the palladium market as high inflation, slower economic growth, tighter monetary policies, and China's COVID-19 lockdowns have been weighing on the market.
At the time of writing, September palladium futures were trading at $2,139 an ounce, up $114 on the day.
