Foreword: Collateral damage
Pandemics, Putin and pipelines
In 2022 we have witnessed another remarkable period of volatility in the price of palladium. The LBMA price more than doubled – from a low of $1,576/oz to a high of $3,442/oz — between December 2021 and March 2022. Improving production of autos, as the supply of scarce semiconductor components to OEMs recovered after the effects of the Covid-19 pandemic, strengthened the price in the new year. After the Russian invasion of Ukraine began in February 2022, the markets assumed that sanctions on Russia would include a ban on imports from Nornickel, even though this had never happened to any producer in the past, including the darkest days of apartheid in South Africa. When this apprehension proved to be unfounded and palladium continued to reach the market, the price relapsed from the peak to pre-invasion levels. Other conditions then emerged to dampen price sentiment: a stronger US dollar; new shortages of components essential to the auto industry produced in Ukraine; the collapse of auto production in Russia after the imposition of sanctions; consumer spending and industrial output in China hampered by lockdowns in cities affected by outbreaks of Covid-19. Perhaps most significantly of all, the conflict in Europe restricted energy supplies and oil and gas prices soared, leading to a rapid onset of inflation at levels which are likely to slow economic growth. Palladium could become one of the casualties of this war.
Author: Beresford Clarke
Managing Director: Technical & Research
Palladium's wild ride in 2022
The MVP — most volatile precious metal
Source: SFA (Oxford), Bloomberg
The inflation problem for precious metals
Inflation is an especially dangerous beast when goaded by supply shortages rather than excess demand and trying to cage it by raising interest rates risks national economies falling into a recessionary bear pit. In our lead paper, 'Macro and PGM Markets — the Turn of the Screw', James Steel of HSBC investigates the lacklustre price performance of gold and other precious metals, in particular palladium, since the initial surge following the Russian invasion of Ukraine. James identifies the factors which led to a post-invasion sell-off, and probes the relationship between price direction and US monetary policy, dollar strength and, in particular, rising inflation. Referencing the historical behaviour of the gold price, he observes a high degree of consistency between gold and the other metals of the precious metals complex in reaction to these factors. Geopolitical events, however, tend to cause divergent behaviours between gold and the more industrial metals. A survey of likely upcoming levels of palladium demand from the auto industry follows, including analysis of supply chain constraints and other challenges which have emerged since the Ukraine crisis. James
delivers a sober, almost sombre, outlook for overall palladium demand.
Consumer price index, 2012-2022
Source: SFA (Oxford), Bloomberg
Electric vehicle sales continue to increase, and in the US in the first half of 2022 they have risen at a rate of almost 50% year-on-year, despite higher battery material costs. The US administration has now introduced the Inflation Reduction Act (IRA), which contains, inter alia, a complex new incentive programme designed to promote the production of battery materials, battery components and electric vehicles in North America. Does this sound like more bad news for palladium? Not necessarily, according to Lakshya Gupta of SFA in his article, 'Inflation Reduction Act – the Good, the Bad, the Ugly'. Lakshya points out that the current tax rebates available to consumers for buying electric vehicles have been restricted to relatively low production numbers, which the larger OEMs have already exceeded, and are structured to apply only to pure battery-driven vehicles. The new rules will allow the full rebate also to be claimed for plug-in hybrid electric vehicles (i.e. with a combustion engine and a catalyst) and fuel cell vehicles, so that manufacturers could choose to increase output of PGM-containing powertrains to benefit from the incentives on offer, provided they meet the stipulated domestic sourcing requirements. Lakshya concludes, therefore, that the IRA may lead to some upside in palladium autocatalyst demand in the near term. Whether or not the Act will reduce inflation, or survive intact if the balance of power in Congress changes in November is another matter.
Taking everything into consideration, Ralph Grimble presents the customary SFA outlook for palladium supply, demand and price in 'The PGM Markets in 2022'. A tricky task in these most uncertain of times, but with the greater part of the year having elapsed, SFA’s forecast is for a palladium market close to balance, with a slight increase in demand and a marginal reduction in total supply. The underlying details provide clues as to how the palladium market might develop in 2023. Examples from the supply side include the attritional effects of power shortages in South Africa and restricted growth in recycling as economic pressures on consumers reduce automobile scrappage rates; while the price-induced long-term decline in traditional industrial applications concentrates demand in an auto sector turning to battery electric vehicles and the substitution of palladium with less expensive platinum in autocatalysts for gasoline vehicles.