Demand for palladium, last quarter’s best-performing precious metal, is exceeding supply for a second consecutive year as mine production stagnates while sales by automakers, the biggest buyers, reach record highs.
Consumption will beat production by 511,000 ounces in 2013, or about what the car industry uses every seven weeks, Barclays Plc estimates. Morgan Stanley expects deficits to persist until at least 2017 and predicts a record annual price average in 2014. Palladium will average at least $770 an ounce in the fourth quarter, or 15% more than now, according to the three most-accurate forecasters tracked by Bloomberg Rankings over the past two years.
The commodity is one of three supply shortages left among the 10 base and precious metals tracked by Barclays, along with tin and platinum. Palladium is still 40% below the record $1,125 reached in 2001. The slump spurred a 45% surge in buying by carmakers in the past five years and Morgan Stanley expects record autocatalyst demand in the next five. Hedge funds are now the most bullish on prices in at least three years.
“Palladium looks very good,” said John Stephenson, who helps manage about C$2.7 billion ($2.74 billion) of assets at First Asset Investment Management Inc. in Toronto. “Investor demand is pretty strong for palladium. It also has its auto-demand kicker.”
The 10% gain in palladium the past quarter compared with retreats for platinum, silver, gold and the LMEX gauge of base metals from aluminum to zinc. The Standard & Poor’s GSCI gauge of 24 raw materials declined 2.9% and the MSCI All-Country World Index gained 2.5%. Treasuries lost less than 0.1%, a Bank of America Corp. index shows.
Global car sales exceeded 80 million for the first time ever in 2012 and will advance 2.4% to 82.7 million this year, says LMC Automotive Ltd., a research company in Oxford, England. Americans will buy more for a fourth year, matching the longest run of gains since the 1940s. An average autocatalyst contains about 4 grams (0.13 troy ounce) of palladium, platinum or rhodium, according to London-based Johnson Matthey Plc.
Supply from mines and stockpiles will rise 0.3% this year after contracting almost 11% in 2012, according to Barclays. Pay protests spread across South African mines after starting in the platinum pits in August. The issues that sparked the disputes persist and more disruptions are likely this year, Tim Murray, a general manager for Johnson Matthey, told a conference in New York in November.
Sales from Russian government stockpiles will drop to 200,000 ounces this year, from 1 million ounces as recently as 2010, according to Barclays. The reserves, a state secret, are probably close to being depleted, Johnson Matthey estimates.
Hedge funds and other large speculators almost tripled wagers on higher prices since the start of November, U.S. Commodity Futures Trading Commission data show. The palladium futures market is valued at about $2 billion, New York Mercantile Exchange data show. The funds have never been more bullish in the data going back to December 2009.
That contrasts with seven consecutive monthly declines in metal held through exchange-traded products, data compiled by Bloomberg show. Holdings stand at 57.6 metric tons valued at $1.27 billion, still 12% more than a year ago. Investment demand probably will total 100,000 ounces (3.1 tons) this year, down from 430,000 ounces in 2012, Barclays estimates.
Some investors are concerned that global economic growth will slow after Japan and the 17-nation euro area tumbled back into recessions and U.S. policy makers failed to resolve all the budget issues after settling a dispute over $600 billion of automatic tax rises and spending cuts this month. China, the biggest car market, is only now quickening again after slowing for seven quarters.
The anticipated surge in prices poses a risk because it threatens to crimp demand. Carmakers cut consumption 48% between 1999 and 2002 as palladium reached a record because of disruptions to Russian exports. The amount they used in 1999 wasn’t reached again until 2011, Johnson Matthey data show.
Carmakers also may be more reluctant to commit to future demand as prices climb. Ford Motor Co., the second-largest U.S. automaker, used futures and options to lock in palladium costs during the surge to the record in January 2001. That culminated in a $1 billion loss for the Dearborn, Michigan-based company as prices tumbled as much 72% in the following 11 months.
The most-accurate analysts tracked by Bloomberg aren’t anticipating a repeat of that this year. Eugen Weinberg, the head of commodity research at Commerzbank AG in Frankfurt, expects a fourth-quarter average of $950, while Michael Widmer at Bank of America in London projects $800. Tom Kendall, the head of precious-metals research at Credit Suisse Group AG in London, forecasts $770. Palladium for immediate delivery rose 0.1% to $670.70 an ounce at 11:43 a.m. New York time.
Equity analysts are bullish too. OAO GMK Norilsk Nickel, the biggest producer, will report a 15% gain in profit this year to $3.34 billion, according to the mean of seven estimates compiled by Bloomberg. Shares of the Moscow-based company rose 17% in 2012. Those of Johannesburg-based Anglo American Platinum Ltd., its nearest rival, retreated 16% as strikes disrupted work at its South African mines.
Chinese sales of passenger vehicles rose to the highest in almost two years in November, the China Association of Automobile Manufacturers said Dec. 10. Sales should increase by about another 10% in 2013, Xu Changming, the director of information resource development at the State Information Center, part of the nation’s top economic planning body, said at a conference about two weeks earlier.
“The expectations are very bullish for palladium,” said Frank Holmes, the chief executive officer of San Antonio-based U.S. Global Investors Inc., which oversees $1.8 billion of assets. “Inventories for palladium in Russia have dwindled down, and on the demand side, we have emerging-market growth in auto sales.”