LAWRIE WILLIAMS: Palladium price saved by sanctions on Russia!
One of the side effects of the Russian invasion of Ukraine and the imposition of severe economic sanctions on Russia by many countries, including virtually all of Europe, has already been seen in a strong rise in the oil price given Russia’s major position in global oil production. This will likely prove to be a stimulus to the global uptake of electric powered light vehicles (EVs), despite a corresponding rise in electricity costs. Even with electricity being more expensive, EVs – particularly battery-powered ones (BEVs) - will remain cheaper to run than petrol (gasoline)-powered vehicles and this will almost certainly stimulate BEV take-up as ever-improving battery technology, and increasing access to charging points, makes range anxiety somewhat less of a problem in terms of adversely affecting BEV purchasing decisions.
We had always been rather dubious, accordingly, about the future price prospects for palladium, but the current situation has changed our views substantially, and almost overnight. The short term effects of the Russian invasion have been very positive for the metal price. Palladium demand had largely been dependent on its uptake as a primary catalyst in internal combustion engine driven light vehicle exhaust emission control systems. The downturn in the new vehicle market because of computer chip shortages had been having an initially adverse impact on palladium demand in consequence. But there has now been a very substantial palladium price recovery over the past week or so as Russian sanctions have been implemented.
BEV take-up has also not been nearly as advanced in the huge U.S. market as in other key markets like Europe and China. But now, high gasoline prices may thus force the U.S. market to turn around, but even so, with the onset of Russian sanctions this may not prove to be that adverse for the palladium price. There is also the assumption that the new automobile market should be taking off again now Covid-related infections and restrictions seem to be easing which will enhance sales for conventionally powered vehicles already in the pipeline.
Even so, ever-rising inflation, which is likely to be boosted in particular by increasing energy prices, will be curtailing household budgets which could, on their own, lead to reduced new vehicle sales. Add to this a potential boost to BEV sales and the medium to long term outlook for palladium demand for exhaust emission control systems could well be reduced – perhaps quite substantially which does not bode well for prices going forwards long term. But short term the palladium market has received a huge boost from the potential effects on Russian supplies.
High demand and tight supply had been keeping palladium prices elevated given the metal had been in a severe supply deficit situation. That supply deficit had been falling away until now and production had appeared to be moving towards a surplus which would have potentially decimated prices – particularly so if BEV take-up was starting to eat into traditional petrol (gasoline) driven vehicle markets. But the economic sanctions on Russia may have put perhaps a temporary end to that.
Many key markets, though, have been instituting bans on the manufacture and sale of internal combustion engine light vehicles to take place at some time in the future. Such a ban is already in place in Norway which has been a leader in the field. All this had been putting a dent in likely long term palladium demand, but perhaps not now.
Many automobile manufacturers seem to be embracing the move to EVs with a switchover to the manufacture and sale of electric powered vehicles as they see that this is the direction in which the markets are moving and they don’t want to be left behind. However it may still take some years before this kind of replacement of the internal combustion engine is completely phased out and palladium will retain an important, but perhaps diminishing, role in the market until this occurs.
Meanwhile, though, the palladium price is seeing something of a huge boost as economic sanctions against Russia (the world’s largest producer of the metal accounting for over half of global supply) begin to take effect. If Russian palladium is removed from the market it will likely swing back into a severe palladium supply deficit situation again and we are already seeing initial signs of this with some very sharp price increases for the metal since Russia’s Ukraine invasion commenced.
We had earlier been predicting that the platinum price might catch up with that of palladium perhaps this year but the Russian sanctions situation may well have changed all this substantially if the global palladium supply chain is thus severely interrupted. If this is indeed the case then our earlier warnings about palladium price deterioration could well be delayed quite substantially. We would thus revise our earlier year-end palladium price forecast hugely from a rather pessimistic $1,350 an ounce, down from the current level of around $2,500, up to $3,000 an ounce if the Russian sanctions stay in place, which we think they will. This would be quite a change in our expectations and move palladium from the bottom to the top of our precious metals price growth predictions for the current year. This all demonstrates how geopolitical events can change the market and pricing picture almost overnight!