There are compelling reasons to think that prices should move higher not withstanding potential weakness in other precious metals. To be sure, there is a broad consensus that the palladium market is set for multi-year deficits.
The key question, however, is at what price inventories might start to be drawn down. I think stocks are relatively high notwithstanding the end of large Russian government sales and discounting ETF holdings. But given the outlook for consumption is so positive and mine supply isn't doing too much, I think consumers will be happy to strategically hold large stockpiles, which shouldn't in itself provide downside risk to prices at these levels.
Palladium is also much more exposed to auto volume growth by virtue of being almost exclusively used in gasoline three-way catalysts. The three biggest gasoline-oriented markets in China, the US and Japan have collectively shown strong growth in early 2013 and the multi-year outlook is positive.
Furthermore, palladium is benefitting from substitution in diesel autocatalysts. So while European auto demand is poor, palladium consumption is still increasing at the expense of platinum.
While it is consensus that the demand and supply equation will be in deficit for a long time what is more controversial is the level of inventory.
Since the mid-1990s, the big uncertainty was the drawdown of Russian stockpiled metal that was managed by the state run agency Gokhran.
But these stockpiles are now reportedly greatly reduced, with sales in the last few years much lower and likely to be close to zero in the years to come.
This metal, however, has not been entirely consumed. Some of it has ended up as ETF holdings. Some of it remains in private vaults in Switzerland. It also appears that consumers of palladium have built up inventory too.
But a big portion of this does seem to be going into more visible stock in ETFs, which broadly corresponds with exports to the UK.
While this could just be seen as stock shifting, I think the ETF holder are a much different beast to the private banker hoarding metal in Switzerland. In particular, their price point at which they will sell out is likely to be quite different.
Around the same time we also saw an increase in exports of palladium into China, although that has since tailed off in the later stages of 2012.
To me this is a sign that autocatalyst makers built up stock in 2011 given the outlook for deficit markets for years to come driven by the strong outlook for growth in Chinese palladium consumption.
Does the fact that catalyst have more than enough metal at the moment provide downside risk to prices? I dont think so at this price point, as much of this purchasing was done around similar prices to what we have seen today. This to me suggests that the catalyst makers themselves think palladium prices are relatively low compared to what we are likely to see over the next few years.
Consumers could be wrong, with strong recycling or thrifting/substitution in other end uses like electronics potentially providing downside risks. But for me, prices are likely to have to go quite a bit higher first before the risk of thrifting or destocking or investor selling becomes a risk.
