Dharmesh Bhatia
Palladium price broke all records at $2,577 oz at the beginning of this week, with the rally being driven by momentum and supply crunch. The metal’s surge is traced to positive fundamentals, with supply concerns as stricter emissions standards boost consumption by carmakers.
The precious metal has grown by over 27 percent YTD, due to a global shortage of supply and increased demand in China. However, it fell to $2,378 on Wednesday due to economic concerns from the virus outbreak in China.
Nevertheless, Palladium rebounded as China’s moves to contain a deadly virus eased investor concerns. With speculation that the respiratory illness will not be as concerning as initially feared, anticipations over tight supplies are back in the play.
Another factor is that producers cannot boost output easily in response to price increases because palladium is largely mined as a by-product.
The cost to borrow palladium has jumped to its highest in over a year.
The rising price is an advantage for some mining companies as constrained mine supply will make it difficult for consumers to obtain the material. The rally has also led to a rise in thefts of catalytic converters (silencers) around the world.
Carmakers are reluctant to switch catalytic converter technology due to global growth uncertainty and the level of substitution has been less evident than expectations.
As palladium rallies to an all-time high the size of stockpiles becomes a concern simultaneously. The rate at which the prices rallied this year, it has prompted the market’s trade association to warn that low stockpiles and the difficulty in a quick supply response means that the supply shrink will probably last for a while.
Palladium ETF’s decrease for fifth straight day
Palladium holdings have decreased by 1622 t oz for the fifth straight day today. Palladium’s status as a by-product to platinum or nickel mining means producers aren’t quick to respond to price changes and the output is expected to fall short of demand for a ninth straight year in 2020.
Although, palladium’s rise relative to platinum might prompt some carmakers to work on a substitution but there are no indications from automakers that when such a change will take place. This further raises chances of an upside potential as the market is now in a demand-rationing phase.
(The author is Associate Vice President, FX and Commodities, Emirates NBD)
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