Four things about palladium
Industrial demand for the metal looks set to strengthen
Published: 14:49 March 31, 2013
After the previous week’s sell off, palladium attracted buyers and traded higher during the week, recording gains each day. A key use of palladium is for catalytic converters and the improving auto business in China and the US should support prices, said Max Knudsen, chief market strategist at ADS Securities. Last week’s gain of $31 was the second smallest in the past year.
Eighty percent of the worlds supply of the metal comes from remote, unprofitable mines located in South Africa and Arctic Russia. Supply has always been unpredictable. This week, these two producers announced they are to set up a trading block to coordinate global exports to “influence” the market. In 1997, Russia shocked the market by holding up shipments and over the next four years palladium increased to a high of $1,130 a tonne.
Also this week Amplats, the worlds largest producer of metals in the platinum group including palladium, is in discussion with the South African government about closing two mines. There is also heavy speculative involvement in the metal with 71 percent of the open interest in palladium futures on the NYMEX exchange held by speculators.
Zimbabwe, Russia and South Africa are responsible for 90 per cent of the world supply of palladium, but production in the two African countries is dropping because of a lack of capital and political instability. In Russia, the concentration of palladium in its mines is declining. New mines will take years to come on stream.
Meanwhile demand is steady. The strengthening auto business in China and the US, and the drive to address pollution in China, will support demand for palladium.
What to do?
Palladium is far more volatile than gold. Since the 2001 all time high there have been three bear markets, including price falls of 87 per cent; and three bull rallies, including the current increase of 450 per cent since the low in 2008. The heavy speculative interest in palladium means the market is vulnerable to a large price fall on profit taking sparked by any bad news.
“For this reason, while I think palladium is a buy, using call options would offer some protection from any volatility and sudden profit-taking shocks along the way,” said Knudsen.