Palladium fundamentals have looked encouraging for prices for sometime, although the catalyst for this move looks to be more about the risk of sanctions on Russia given tensions in Ukraine. European natural gas prices have also been quite a bit stronger, while even aluminium has managed to rally.
As background, Russia is the single largest producer of mined palladium, accounting for ~40% of global mine supply. This supply is produced by Norilsk as a by-product of its nickel operations.
Norilsk have signalled that 2014 production should be around that of 2013. This was ~100 koz lower than 2012 levels.
Russian government agencies have also historically been a large seller of stockpiled metal, although this influence on the market has dwindled over the last few years. Although this stock no longer sits in Russian hands, a large proportion of these sales have been stored elsewhere (e.g. physical ETFs) rather than consumed.
It also helps that supply elsewhere is struggling, with South African production looking increasingly under threat the longer the current impasse on wage negotiations continue, with Implats calling force majeure on some of their supply contracts.
Demand is also looking good thanks to strong auto production/consumption in diesel oriented like China, US and Japan (see this post).
That said, it could be argued that the recent pop in prices could prove as fickle as investors reactions to headlines from Ukraine, which are likely to be changing on a daily basis. That hardly presents a good fundamental reason to buy into this move.
There does appear to be room for prices to move higher as shorts are squeezed out. While net positioning is overwhelmingly long in palladium (relative to other metals and the last couple of years), there are more short positions in palladium than there has been since late 2012.
To be sure, palladium has been looking for a catalyst to break out of its trading range, with just about everyone bullish on the metal given fundamentals. While this recent move maybe based on headlines which could change quickly, there are other reasons to stick with palladium as a longer term bet.
