Wednesday, May 18, 2011

Structurally Bullish Palladium

Structurally Bullish Palladium
May 18th, 2011

The fundamental backdrop for palladium continues to improve, moving from a surplus of 680,000 ounces a couple of years ago to a shortage of 490,000 ounces last year.  Johnson Matthey Plc, one of the top dealers and analysts in the PGM space, is forecasting the largest supply deficit in a decade in 2011. 


The biggest source of demand for palladium comes from automobile producers, who use the metal in catalytic converters.  While demand from this space fell dramatically following the financial crisis and ensuing economic contraction, it has since rebounded and is now at a record high.  Consumption from car manufacturers jumped 35 percent last year to 5.45 million ounces. 

Another big source of demand, which is relatively new, is from investors buying physically backed ETFs, much like the well known GLD or SLV.  These funds have only been buying the metal for a few years, and have accumulated 2.173 million ounces so far.  Last year they bought 1.09 million ounces, up 74 percent from a year earlier.  As more and more retail investors turn to commodities, and specifically metals, as a store of value and a hedge against what seems to be inevitable inflation, this could prove to be a significant source of future demand. 

All told, total demand rose 23 percent last year to 9.63 million ounces. 


The supply of palladium is a little bid weird.  The largest source comes from South African mines, which traditionally produce between 2.5 to 3 million ounces.  The second biggest source are the Russian mines, however Russian production is supplemented by sales from government stockpiles.  The government sales, which last year totaled 1 million ounces, are seen as crucial to maintaining balance to this market which would otherwise be in perpetual and very serious deficit.  The catch is that the quantity of government stockpiles is a closely guarded state secret, so it is impossible to predict if and when these sales will dry up.  Standard Bank Group Ltd. has predicted that they will be depleted as early as this year, though it is unclear what this prediction is based on.

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

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