Prospects for Palladium – Robin Bhar, Head of Metals Research, Societe
Generale
Presented at the 8th China Gold
& Precious Metals Summit, Shanghai, China, December 5-6, 2013
Conclusions:
The automotive sector is the key
to palladium markets. In the palladium market, the sector absorbs 61% of gross
demand and 55% of the net market. The
geographical distribution is more even. In the palladium market, unlike
platinum, the distribution is more evenly spread, with North America and the EU
each accounting for approximately 25% of the auto sector. China accounts for
over 20% of palladium demand.
The Improvement in the global
economy will underpin a recovery in demand (prior to ETF investment) in
palladium. Palladium is continuing to make inroads into the diesel sector as a
result of the substantial reduction in the sulphur content of diesel fuel (the
EU consumes a much higher proportion of diesel in its auto sector than
elsewhere in the world).
The electronics sector is the
second most important element in the palladium market. It has been sluggish for
much of 2011 and 2012.Demand in 2013 has dropped to its lowest level since
2009. A shift to handheld devices is causing sales from PCs to tumble, with the
former containing far less palladium per unit. Additionally, in future years
demand growth is set to be modest as companies remain thrifty with their usage
of the metal, especially as the price of palladium rises. Substitution will
again be a key feature, with palladium being replaced by base metals as the
electrode material for chip capacitors in the electronics industry and by
ceramics and non-precious alloys in dentistry. Purchases of Palladium by the
chemical industry remain unusually strong by historical standards.
Chinese gross palladium jewellery
demand has continued to wither away. Chinese demand from this sector has now
been overtaken by demand in the rest of the world, which is quite a contrast
from 2005 when Chinese demand was more than five times the total elsewhere. Investor
sentiment will be important in underpinning palladium sentiment from 2013
onwards. Increased investor confidence in the industrial outlook will give
palladium longer-term support. Given that Absa has received approval for a
South African palladium ETF, subject to certain conditions, including the
requirement that the fund's metal is of South African origin, than this could
be a significant source of demand over the coming year. While the exact scale
of investor interest is somewhat of a wildcard, given this year's events it has
to be seen as a significant upside risk even to our bullish palladium price
forecasts. For now, we have estimated that net purchases of palladium ETFs next
year could be in the order of 150,000 ounces and that we expect palladium
prices to remain well underpinned over coming months.
Palladium is expected to be the
best-performing metal in both the short and longer term. Palladium is already
in a chronic deficit, even after accounting for Russian sales from stockpiles
in 2013, and this has aided its out performance so far in 2013. Furthermore, we
continue to expect that further Russian shipments are likely and that overall
supply next year will therefore fall to its lowest level since
2003.Consequently, and despite demand ebbing, especially in the price-sensitive
jewellery market, the deficit will grow to over one million ounces next year.
In fact, the likely launch of a new palladium ETF by Absa is also likely to
provide a boost to investor purchases over the next year.
We also expect a recovery in auto
catalyst demand from 2015, and this will dwarf further reductions in more
price-elastic elements of demand, meaning that stocks will continue to dwindle.
As a result, we expect the price of palladium to continue to rise throughout
the forecast, to an annual average of $1,000 in 2018, when it is expected to
exceed that of gold.