Peter Hobson

LONDON (Reuters – Palladium’s final rally is expected to take place next year, as a recovery in the automotive sector increases demand for the metal in exhausts. However, prices will continue to decline due in part because of the advent of electric vehicles.

In order to eliminate harmful emissions, carmakers use palladium to insulate exhaust pipes. For years, increasing auto sales combined with tighter emissions regulations led to an increase in demand.

The price of palladium rose more than 500% from its 2016 low of $500 per ounce to an all time high of $3,017.18 for May. This is a significant increase of over 500%.

According to Metals Focus, prices plummeted to $1,800 because of a shortage in semiconductor chips. This forced automakers to reduce output. The result was a 10-million-ounce market that sees an annual surplus of approximately $10,800.

Marcus Garvey, Macquarie analyst, stated that “at these levels we’re bullish.”

Garvey stated that auto production could rise 15% by 2022 due to chip shortage. This would push the palladium market towards a deficit of roughly 500,000 ounces and price back toward $2,500, or higher.

(Graphic: Palladium rollercoaster, https://fingfx.thomsonreuters.com/gfx/ce/lgpdwozdbvo/PGM%20YEAR%20ENDER%20PRICES.JPG)

Citi analyst Max Layton said that the rally will be swift when it arrives. Speculators are eager to exit their largest net short position since 1995 on Nymex, which is equivalent to nearly 400,000 ounces palladium.

(Graphic: Speculators turn bearish on palladium, https://fingfx.thomsonreuters.com/gfx/ce/lgvdwozgypo/PGM%20YEAR%20ENDER%20POSITIONING%202.JPG)

Things soon become bearish.

Layton stated that “whatever price you see in the next 12-24 month, we will have witnessed the high end of the cycle.” Plaladium is antithesis to battery materials. According to the eye, sequential demand for palladium will decline starting in 2024.

Around 85% of world’s current palladium supplies are consumed by the auto industry.

Falling production of combustion engines and recycling of old vehicles mean that by 2040 – probably earlier – autos will give more palladium back to the market than they take from it, said StoneX analyst Rhona O’Connell.

(Graphic: Palladium oversupply looms, https://fingfx.thomsonreuters.com/gfx/ce/akvezowyrpr/PGM%20YEAR%20ENDER%20BALANCES.JPG)

6 percent of 2022’s vehicles will be powered solely by batteries, which will rise to 16% in 2025 according Wilma Swarts, Metals Focus. She predicts that palladium prices will decline slowly, rather than collapsing.

The rising demand for palladium is also eroding. This is because it can be cleaned of emissions, and is much cheaper at $950/ounce.

Swarts stated that this substitution will result in automakers using 200,000 ounces more palladium next year, and 400,000 ounces less by 2022.