Palladium: Following copper on Russian destocking and demand uncertainties

Palladium: Following copper on Russian destocking and demand uncertainties

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The long-term opportunity for palladium is a combination of vehicle growth in gasoline-intensive regions, increasing environmental standards in emerging markets, supporting rises in loadings, and price relative to platinum, underpinning continued substitution. This is exacerbated by a market deemed in deficit, excluding destocking from Russian strategic inventory.
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The case against palladium in the near term is that this has been a well recognised opportunity, and thus, the fourfold price rally since 2008 brought forward the fundamental opportunity. The price weakened in 2011 on disappointingly elevated Russian sales (JM estimate 750koz), slowing macro, and subsequent disinvestment (ETF, Nymex). Therefore, we view the price correction in 4Q as a function of the market getting ahead of itself on fundamental tightening rather than a breakdown of a positive fundamental medium-term opportunity.
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The strong price activity from 2008 to 2011 was associated with an implied 3moz destocking from Switzerland, indicative of a fundamentally tight market but not reflective of the continuing stock overhang (we estimate at least 3moz in Switzerland).
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Given that Pd is a by-product metal (to Pt in S.Africa and Ni in Russia) and hence lacks primary supply elasticity, has relatively large visible above ground stock and we are cautious global macro in 2012, we view investment flow as key to near-term metal price performance. Copper may be a useful proxy for Pd price action.

Palladium: On cusp of tightness, but price and positioning ahead of fundamentals

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JM estimated a surplus of 725 koz in 2011, the bulk of which was due to another year of Russian stock sales (750 koz). Gross Pd gross demand was down an estimated 9% y/y. This was primarily due to net liquidations (285 koz) in investment/ETF holdings. Gross autocat and industrial demand rose an estimated 6% and 7%, respectively, while gross Pd jewellery demand was lower by an estimated 8% y/y. Total supply was up an estimated 1% y/y. JM forecasts a fundamental Pd market deficit in 2012 once Russian stock sales taper off, and a six-month average price of US$650.

Palladium Surplus and deficit

Palladium GLOBAL SUPPLY AND DEMAND