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There was no spike in year-end shipments, and neither have shipments to alternative ports such as Hong Kong or the UK risen to compensate. Johnson Matthey forecasts Russian shipments at around three tonnes (96koz) in ..

26 Apr 2013

LONDON (Commodity Online): Palladium prices may average $748/oz in 2013, and rise to an annual average of $795/oz in 2014, stated London based Barclays in its recent market analysis.

“We forecast the palladium market to remain in deficit for a second year, and we do not see this as a short term phenomena. We believe this will be the start of serial annual deficits for the market,” it added.

From a deficit of over 1Moz in 2012, Barclays expects the palladium market to deliver a deficit of 700koz in 2013, followed by 639koz in 2014. Supply looks set to remain constrained this year, with growth in secondary supply only marginally offsetting the expected decline in mine output to leave a flat supply picture.

While relative to last year total demand looks softer, demand from core end users such as the auto sector and chemical industries is set to grow.

The relative weakness stems from Barclays conservative estimates for ETP demand and declining interest in jewellery, which represents less than 5% of total demand.

The two swing factors for the palladium market are the size of the Russian state stockpiles and ETP flows. However, with inflows of 418koz last year, these two areas of weakness were superseded by a slowdown in China’s palladium shipments, accompanied by the long standing debate over Russian state stock shipments.

Although not conclusive, the available trade data certainly supports the thesis that Russian stockpiles have declined. Full year Swiss trade statistics for 2012 show that palladium imports from Russia fell to their lowest level since 1990, tumbling by 72% y/y to 154.6koz.

There was no spike in year-end shipments, and neither have shipments to alternative ports such as Hong Kong or the UK risen to compensate. Johnson Matthey forecasts Russian shipments at around three tonnes (96koz) in 2013. Barclays forecasts assume state stock releases of 200koz in 2013 and 150koz in 2014. The same issues challenging platinum mine output are set to plague palladium.

The real scope for supply growth stems from recycling. Firmer palladium prices are likely to draw out spent canisters and, in turn, the bank expects auto scrap to grow by 9% y/y, versus a fall of 8% y/y in 2012. However, overall supply is likely to be flat.

The second area of weakness is the slowdown in China’s imports. Monthly palladium imports in 2012 dropped to their lowest since February 2009, while full-year imports fell to the 2007 low.

Imports, which have shown signs of stabilising, are currently down 13% y/y for the year to February. It bodes well for palladium that auto analysts at Barclays expect stronger growth in auto production across the core regions.

They expect growth of 7% in auto sales in Greater China, rising to 8% y/y in 2014, and growth of 1.9% y/y across North America in both 2013 and 2014. The China Association of Automobile Manufacturers has reported growth in auto sales of 15% for the year to February while US auto sales are up 8% y/y over
the same period.

Coupled with the ongoing substitution of platinum by palladium in diesel auto-catalysts, the demand backdrop looks the most supportive across the complex.

The key risk in the near term, in Barclays view, is investment flows. Physically-backed palladium ETP holdings are at 2.398Moz, less than 1% shy of the peak of 2.437Moz reached in April 2011. Inflows are up 189koz, with most of the growth stemming from US listed products.

Tactical positioning, on the other hand, continues to scale record highs. Nymex palladium net fund length is at 2.797Moz after growth of 843koz this year.

Given the market’s constructive fundamentals, positioning certainly has scope to increase. However, as positions are elevated, this poses the risk of profit-taking in the very near term.

Barring this risk, the bank believes palladium fundamentals offer a constructive backdrop of tight supply, the greatest scope for demand growth, while the risk of supply being boosted by Russian state stock shipments looking like it will take a back seat for the time being.


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