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LAWRIE WILLIAMS: Metals Focus bullish on palladium long term but...

In its latest weekly newsletter to clients, London’s Metals Focus consultancy looks at palladium’s almost horrendous fall from grace pricewise and asks the question : Palladium’s dismal performance: buying opportunity or trend?  

Indeed palladium is a terrific example of markets trumping analysts and that in these days of High Frequency Trading and enormous speculation on the futures markets, it is other factors than fundamentals that really move the prices in a relatively small market like that for palladium.  Last year virtually every precious metals analyst out there was predicting that palladium would be by far the strongest performing precious metal as its fundamentals looked so positive.  In the event it was about the worst performer of all.  You can’t rely on the analysts to make you money in these hugely manipulated markets where futures, coupled with high frequency trading, and a major degree of investor sentiment, really call the tune.

And palladium’s dismal performance has continued into the current year – in spades.  Metals Focus points out that at the time of writing its report the metal price had fallen 17% this year already – and we’ve only a couple of weeks in so far.  This is despite analysts like those at Metals Focus predicting a huge deficit in supply against demand – surely this flies against any economic advice that supply/demand market forces are primarily responsible for setting prices – at least in the short term?

Why has palladium performed so badly.  Probably two main factors here.  Above ground stocks and China – although global growth being rather weaker than politicians and many analysts would have us believe will also have been a contributor. 

More so than any other in the precious metals complex, palladium is very much an industrial metal and its price is largely dependent on perceived demand in the autocatalyst sector where it dominates in the petrol (gasoline) light vehicles market.  And the two biggest light vehicles markets are the U.S. and China with the biggest growth expected in the latter.  The Chinese slowdown is thus having an important effect here, although the intensification of Chinese anti-pollution legislation may well mean that any fall off in auto-sales, if this actually happens – don’t forget that Chinese GDP is still growing, albeit at a slower rate – will be more than offset by higher palladium autocatalyst loadings to meet new legislation.

Metals Focus agrees with this in essence in saying that the principal factor has been the weakness of Chinese, US and, to a lesser extent, other equity markets. This has affected industrial commodities in general, with palladium suffering as part of this complex.

Meanwhile, Metals Focus notes that forecasts by most precious metals analysts, including by its own analysts, still see hefty deficits in place for this year and also further ahead. With such a stark contradiction between price performance and perceived fundamentals, it comments that the question arises: does the current palladium price offer an exceptional buying opportunity, or is this a simple case of supply-demand estimates and forecasts essentially being wrong?

This brings us back to the other major component in the supply/demand pattern as it affects the palladium market – Inventory overhang.  Metals Focus estimates that by end-2015, there were 13.7 million ounces of palladium stocks in the market, accounting for 16 months of demand.  The existence of such stockpiles means that in spite of the deficits, there is no real physical shortage. This leaves palladium prone to investor whims - when they are keen to acquire this inventory the price can increase rapidly, but equally when investor demand evaporates there is limited fundamental support to prevent a sharp decline.

With all the above in mind, how does Metals Focus see the likely outlook for palladium prices?   In short it is long term bullish – but note ‘long term’.  Looking at the biggest perceived growth market, China,  Metals Focus analysts are anticipating a Compound Annual Growth Rate of around 8% in palladium autocatalyst demand in the country. This suggests the continuation in the supply/demand deficit but with it being relatively slow to come down.  As Metals Focus puts it this means that it sees the outlook for palladium’s fundamentals over the next half-decade as being at least benign and most probably positive. (But note half-decade!) With this in mind and given its belief that eventually market fundamentals will reassert themselves, the consultancy remains palladium-bullish in the long run.

But at the same time, Metals Focus notes some concern over near term prospects for the metal price.  It says that Western investor attitudes towards China and other emerging markets are so negative they are somewhat akin to their over-exuberance of only a few years ago.  This latter led to a serious commodity price bubble developing.  In a similar vein on the downside, investor sentiment seems to be so negative towards China in particular that the consultancy won’t rule out even further near term price declines for palladium.  Not a great deal of joy here in the analysis!

So, the answer to the question posed at the start here is long term bullish, but things could well yet get worse before they start to improve.

14 Jan 2016 | Categories: Palladium

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