(Kitco News) - A potential supply crunch is creating new momentum in palladium as prices push above $1,150 an ounce, up more than 9% on the day.
According to reports, palladium’s fortunes have turned after the U.S. government asked its Group of Seven allies to consider placing sanctions on Russia’s supply of the precious metal, along with titanium.
Russia is one of the top producers of palladium and titanium, and both metals have been excluded from Western-led sanctions imposed after it invaded Ukraine in 2021. Russia accounts for 41% of the global palladium supply, which is why it has an outsized influence on PGM markets.
Although demand for palladium has dropped in recent years, it continues to outstrip supply. In May, global PGM refiner Johnson Matthey said it expects the palladium market to see a deficit of 358,000 ounces this year, down from the one-million-ounce deficit reported last year.
However, analysts note that due to consecutive deficits in the last four years, above-ground stocks are nearly depleted.
“In the short term, it may further rattle a long-held spec short while raising supply anxiety in a market that remains in a deficit,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank.
Daniel Ghali, Senior Commodity Strategist at TD Securities, described the price action in palladium as a fear trade, which might not be sustainable. He noted that European nations have previously denied this request from the U.S.
However, he added that momentum could end up pushing prices higher in the near term.
“With flows over the last weeks otherwise muted and with US election season underway, there are pathways for momentum to persist in the near term. Interestingly, however, the scope for subsequent CTA buying activity is limited, with a large uptick over the coming week only likely to spark small-scale purchases from algo traders,” he said.
Although palladium prices are attracting a lot of attention Thursday, some analysts warn investors that they should look at the bigger picture. Palladium prices have been in a strong long-term downtrend, with prices down significantly from their highs above $3,000 an ounce seen in July 2022.
Analysts note that the palladium market continues to shrink as automotive companies switch over to cheaper platinum. Either precious metal can be used in catalytic converters to remove harmful emissions from gasoline-powered engines.
Only platinum can be used in diesel-powered engines.
While palladium prices will remain volatile in the near term, Michael Widmer, Commodity Strategist at Bank of America, said that the market needs to see a fundamental shift to support higher prices in the long term.
He noted that the shrinking market means that palladium could start to see market surpluses, which would put further downward pressure on prices.
“We continue to see palladium surpluses, so we do not consider the recent upside a wholesale reassessment of fundamentals. Indeed, much of the rally has been flow-driven, as reflected in a halving of short positions,” he said in a report Thursday. “We remain cautious and do not believe the rally is sustainable, as palladium fundamentals look set to loosen further in 2025 unless more production cuts emerge.”
Widmer said that for prices to turn around, Russia needs to follow through on its threat of production cuts in 2025.
“If that happens, we see potential for prices to move up, giving some breathing room to South Africa's miners,” he said.
