Palladium: The market remains in a deficit

UNITED KINGDOM July 09 2015 9:28 AM

LONDON (Scrap Register): Palladium is rivaling rhodium for the worst performing precious metal year to date, down 16%. The fundamentals of palladium have not changed that drastically to warrant such a steep drop in Deutsche Bank’s view, but the ample stockpiles, now well known to the market, means that investors hold sway.

In contrast to platinum, the net Autocat demand (post recycling) is positive over the course of the next five years, due to the structural demand growth in many emerging markets where gasoline is the fuel of choice. In Deutsche Bank assessment, that puts the palladium market in a fundamental deficit of c.570koz annual deficit for the next five years.

The negative momentum of Chinese vehicle sales, production and Chinese exports has severely dented investor sentiment. Cumulative year to date Chinese vehicles sales have slowed down to +6.4% by May, versus our Auto team’s forecast of 9%.

Chinese passenger vehicle production is however still up by 8% year to date, suggesting a period of destocking on the horizon. The slowdown is significant in the context of global demand, as the Chinese Auto sector comprises 22% of global demand. Chinese palladium imports, seemingly a reflection of weaker Auto demand is down 21% year to date.

Although US Auto sales have remained very robust, there are some palladium market participants that are questioning the sustainability of these levels. US Auto sales in May 2015 increased by a healthy 6% y-o-y, while m-o-m, the growth increased by 7.3% owing to an extra business day in may and also a strong sales on US memorial day. The combination of these factors has weighed on investor sentiment. The net long positions on the NYMEX have plummeted, and are now at Nov 12 levels. The drop in net longs has been 8.5k contracts since Jan 2015, representing 850 koz.

At the same time ETF holdings remain sticky, with limited outflows of 96koz since the beginning of the year. Deutsche Bank highlights their estimate of liquid stocks including ETF holdings, to demonstrate the ample liquidity. Deutsche Bank estimates that these liquid stocks will be drawn down to “critical” levels by 2018E, which will in their view lead to pricing tension.