While palladium's frenzied rally does not seem to be over yet, the fundamentals underpinning its growth look fragile, with signs that palladium exports have not been significantly affected and, more importantly, as the global economy faces recession in the second half of the year, demand from carmakers is likely to decline.
After the escalation of the conflict between Russia and Ukraine, Western countries have imposed a series of severe sanctions on Russia, especially the country's banking system. The key metal hit an all-time high of $3442.47 an ounce last week amid concerns about restrictions on Russian palladium exports, which account for 40 per cent of global production.
However, there are signs that Russian palladium exports will not be hit as hard as initially thought, and palladium prices have since fallen back to nearly $2700, but are still up more than 40 per cent this year.
Vladimir Potanin, president of Russia's MMC Norilsk Nickel PJSC, the world's largest palladium producer, said that although its routes with Europe and the United States had been suspended, they could reschedule cargo through other routes.
On the other hand, under the influence of the escalation of the conflict between Russia and Ukraine, global inflation has intensified and the economy is at risk of recession, which may make palladium a victim.
Most palladium is used in catalytic converters to reduce pollution in gasoline engines, and the auto industry consumes about 85% of the supply, but carmakers are likely to turn to cheaper platinum for cost reasons.
The World Platinum Investment Council said the conflict between Russia and Ukraine could lead to a sharp increase in demand for platinum, with alternative supply reaching 340000 ounces this year, 70 per cent more than in 2021.
Nicky Shiels, head of metals strategy at MKS PAMP, said: "We continue to see [palladium] prices move very volatile and extreme in the first half of this year-prices have upward risks. But fears of a recession are rising as market demand is expected to be suppressed in the second half of the year, when the price risk will turn significantly downside. "
Suki Coope, an analyst at Standard Chartered Bank, expects the average price of palladium to fall from $2763 in 2022 to $2275 next year.
A report by Metals Focus last week pointed out that it is increasingly likely that car production in 2022 will be lower than expected. Metals Focus, managing director of Metals Focus, pointed out that in the near future, Ukraine-related news will certainly support palladium prices, or even rise sharply, but this rally will dissipate later this year.
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