Given the obituaries that have been written about gold and silver, one could be forgiven for thinking that all precious metals bit the dust in 2013.
Whilst we don’t believe any of them have (if anything gold and silver are preparing for bigger run ups) there are likely to be investors out there who are looking to invest in a precious metal that may act as a hedge against the more monetary of its contemporaries.
May I suggest palladium? It was, of course, the poster child of the precious metals. Thanks to an improving auto-industry, mining strikes and declining Russian state stockpiles it was the only precious metal to post gains in 2013, 4.4% to be precise.
Palladium seemed significantly out of favour in the industry-leading report released by Johnson Matthey in November last year, despite a strong performance. However for many analysts making their 2014 market predictions palladium is very much the one to watch out of the four precious metals, thanks to those price drivers (mentioned above) carrying on into 2014.
Is there enough supply?
In simple terms, price should be a product of demand and supply. In the case of palladium, demand was nothing special last year (more on that later), however supply gave cause for concern.
The precious metals market has been dominated by tales of mining costs exceeding the spot price of gold. Should the gold price head below $1,100/oz there are concerns it is likely that it will not be economical to mine the metal.
Whilst the cost of production does not appear to be an issue for either platinum or palladium, there are questions over the supply demand deficit facing the markets and therefore the pressure this will place on prices.
An undersupplied market helps to drive up the price.
Palladium is facing significant supply deficits in 2014, more so than other metals. This is a follow on from last year when it is thought to have had a supply deficit equivalent to 9% of total annual demand.
In their interim 2013 report, Johnson Matthey estimated that the palladium market would be in a supply demand deficit of 740,000 ounces, an improvement on the 1.15 million in 2012 thanks to reduced ETF demand. However, the deficit is expected to cause greater problems as investment demand climbs this year.
The palladium supply demand deficit is estimated to go on for so long, that for BMO Capital Markets the metal is its ‘top pick’ in the metals sector for 2014. They anticipate ‘a deficit market for palladium for many years, which should support prices.’
How was demand for palladium met in 2013? From a rundown of above-ground stock inventories. However the pressure on these stocks will become more acute in 2014.
Last year the world supply of primary palladium fell by 1.5% to 6.43 million ounces, thanks to the fall in Russian stocks. Supply from State Russian stockpiles is expected to fall to as little as 100,000 ounces, a significant drop from the 1 million ounces in 2010. Some analysts are even predicting the supply from this source to be as little as zero.
Some of the deficit projections palladium in for 2014 range between 1 million ounces to 1.277 million ounces. Citigroup forecast a supply deficit of 1.139million ounces this year. They also note that the above ground supply for palladium has fallen by 36% since 2008.
However, it’s not all bad news for supply. South African mine production is expected to pick up this year, as it will in Zimbabwe and North America.
But, one of the major issues for the industry last year was industrial action at the major mines. Last year there didn’t seem to be a week go by without news of industrial action in South Africa’s platinum and palladium mines.
Along with Russia, South Africa is one of the two-largest palladium producers in the world. As with platinum, the industry has been beset with supply concerns thanks to labour issues in South Africa.
These same issues are expected to carry on this year and therefore help to drive up the price.
As with the other precious metals recycling will contribute to supply, Some of the supply demand deficit for palladium may be solved through the recycling of old auto-catalysts. Johnson Matthey estimates that palladium recycling will increase by 7.4% to 2.46 million ounces.
Did demand climb?
Compared to its contemporaries, demand for palladium didn’t do anything significant last year.
Palladium is a predominantly industrial metal and it is known for its role in the auto-industry. Commerzbank forecasts auto-industry demand for palladium in 2014 to hit 7 million ounces, a level it has never reached before.
US and China, the global superpowers, account for around 40% of global vehicle production. Whilst many long-term gold and silver investors believe that the US economic recovery is make believe, there are numbers coming out which suggest there is some element of recovery. So, even if there is stilted recovery in the US, its share of the automobile market suggests significant uplift for palladium demand.
On the flip-side of this, Johnson Matthey believes that ‘other’ industrial demand for palladium will fall this year, as the base metals are used in place of the precious metal in both the electronics and dentistry industries.
In another area, demand for palladium in the jewellery sector fell in 2013. In China (it is not widely used elsewhere) lost its secure foothold and was estimated to have fallen by around 12.4% as the country’s jewellery demand fell to 185,000 ounces from 240,000 in 2013.
What about investment demand? It is, after all the one element of demand we can cater for. Well, even this was in decline last year, despite the impressive price performance. A November 2013 report from Johnson Matthey said ‘fresh investment buying’ was down from the previous year.
Interestingly, for such an industrial metal, it is investment that will be the big deciding factor for the palladium market in 2014. Supply issues will be offset by additional recycling, whilst a boost to auto-demand will be balanced out by a fall in jewellery demand. Therefore investment demand will be the key element to watch.
Investment demand for palladium ETFs in 2013 was said to be ‘muted’, net new investment was projected to be 75,000 ounces, compared to 470,000 in 2012. Despite this, market analysts expect most of 2014 investment demand to come from ETFs and push supply further into deficit.
The launch of a new palladium fund from Absa Capital in South Africa is expected to add extra pressure on the supply levels. The success of a similar platinum ETF launched last year (it became the largest platinum fund in the world) is expected to be repeated for the palladium ETF as investors seek exposure to the metal, rather than the disrupted mining companies.
ETFs aren’t the only way one can choose to invest in palladium, allocated ownership is also an option. And it looks like a pretty good one given the supply demand deficit facing the industry in 2014.