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.