Palladium Ready to Roar Againhttps://online.barrons.com/article/SB50001424052748704551504578481061497850332.html?mod=BOL_twm_mw
Palladium's bull market is about to get supercharged, as demand for the metal is set to exceed supply for a second year in a row in 2013.
Almost 90% of the palladium produced last year went into catalytic converters for gasoline-burning vehicles; the metal scrubs pollution from exhaust gases. Demand from this segment rose 7.5% to a record level in 2012 amid strong car sales and stricter pollution controls, according to Johnson Matthey (ticker: JMAT.U.K.), the world's largest palladium processor. Unlike platinum and rhodium, palladium faces little threat from substitutes because it is the cheapest catalyst used by auto makers.
The good news is set to continue in 2013, as car sales rev up in the U.S. and China, two countries that dominate the gasoline-engine car market. After a slow start hampered by February's Lunar New Year celebrations, Chinese car sales have kicked into high gear, posting double-digit gains in March and April. Meanwhile, U.S. auto sales continue to exceed expectations, with April's coming in at 11% above the year-earlier total.
"When we saw the turnaround in auto sales, that was the first sign that [palladium] price growth would continue," said Dave Meger, director of metals trading at futures brokerage Vision Financial Markets.
At the same time, the palladium supply remains under pressure. Production from South Africa, source of 35% of the palladium mined in 2012, is threatened by strikes. Many mining companies there are due to negotiate their two-year wage agreements this summer, raising the likelihood of more labor problems.
OUTPUT FROM RUSSIA, which hosts the world's largest palladium producer,Norilsk Nickel (NILSY), has been declining as that company struggles with depleting reserves and lower-quality ores. Also, sales from the Russian government's stockpile are expected to fall by more than half as the state hoard erodes after years of feeding the market.
"Palladium remains our top pick in the precious sector, and it has been the best-performing metal in the past two quarters," writes Wiktor Bielski, global head of commodities at VTB Capital, in a report.
Palladium futures gained 9.8% in the final quarter of 2012, and were up 9.2% in the first three months of 2013. To be sure, the ride higher has had its share of speed bumps. In February, futures rallied to a 16-month high of $783.95 a troy ounce on expectations of steep supply cuts by South Africa. But, by April, prices had tumbled to a low of $661.40, as the rout in gold spread to other precious metals.
Palladium futures settled Friday 0.1% lower, at $740.25 a troy ounce on the New York Mercantile Exchange.
Still, Bielski expects palladium to continue its upward march as producers struggle to meet rising demand for the precious metal from car makers and other manufacturers. "We believe the market is entering a prolonged period of supply shortfalls and increasingly tight physical availability, and we expect another sizeable market deficit in 2013," Bielski says, adding that this is likely to fuel palladium's rally. This view is shared by analysts at Barclays, who see palladium prices averaging $780 a troy ounce in the final quarter of 2013, and say "palladium remains our preferred longer-term pick."