Palladium’s perfect storm

Palladium has hit a two-and-a-half-year high around $800 an ounce and the rally isn’t over yet. “Three quarters of palladium supply may be at risk of some form of disruption,” says HSBC’s James Steele. Russia accounts for 42% of supply and South Africa 37%.

Recurrent strikes at South African mines and rising costs have hit output there, while possible sanctions against Russia could cut exports. Many analysts also reckon that Russia’s stockpiles, which date back to the Soviet era, are close to depletion.

On the demand side, two South African banks have launched palladium exchange-traded funds, helping to drum up interest. Of the demand for palladium, 70% stems from the global automobile sector: it’s used in catalytic converters in petrol-based engines. Other industries and jewellery account for the remainder.

Meanwhile, China makes up only 20% of demand, compared to 40% for most base metals, notes Capital Economics. That will change – China’s rebalancing towards consumption-led growth “will underpin steady growth in car ownership and production”. Car demand in the US and Europe is also recovering.

It amounts to a “perfect storm” for palladium, as Edel Tully of UBS puts it. Capital Economics sees prices rising to $950 by the end of 2015.

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