Palladium eyes fresh record highs in 2021 with travel set to climb

Palladium tallied a fifth straight year of gains in 2020 and the rally shows no signs of letting up.

Greater restrictions on air pollution and a likely recovery in travel after the coronavirus pandemic passes is expected to boost demand for the metal which is used in automotive parts.

Tighter emission rules should drive palladium prices higher, especially given the new standards in China, the second-largest consumer of the metal behind the U.S., says Steven Dunn, head of exchange-traded funds at Aberdeen Standard Investments.

To comply with those standards, all new cars in China need to be equipped with “good-quality catalytic converters,” and that reportedly means roughly 30% more palladium per vehicle, he says. “As countries continue to tighten emission standards, palladium stands to be a beneficiary.”


“As countries continue to tighten emission standards, palladium stands to be a beneficiary.”


— Steven Dunn, Aberdeen Standard Investments

Palladium is mostly used in catalytic converters for gasoline-powered vehicles, which turn the most harmful pollutants in car exhaust into more environmentally friendly compounds like carbon dioxide and water, says Dunn. Palladium prices therefore have a high correlation to the auto industry, which is expected to rebound in 2021, he says.

Car and Driver magazine estimated that U.S. new-vehicle sales were down by between 14.9% and 15.5% to around 14.5 million in 2020, bringing sales to the lowest level since 2012. However, the automotive-enthusiast publication noted that a recovery in sales began in the summer and continued through December, amid a surge in Covid-19 cases across the country.

Prices for palladium
PAH21,
+1.13%

PA00,
+1.13%

ended 2020 with a gain of about 29%. It reached a record-high settlement of $2,711.70 an ounce on Feb. 27, 2020, but suffered a drop of 48% from that level to mark their lowest settlement of the year on March 18, at $1,419.80. On Wednesday, the metal settled at $2,448.10, less than 10% below the record high.

Palladium prices have been rising aggressively for a number of years, buoyed by an “acute supply/demand imbalance in conjunction with tightening auto emission standards,” before the pandemic-related effects on demand in 2020, says Chris Blasi, president and chairman at Neptune Global. He expects to see prices this year trade between $2,250 and $3,000, which would be a new record, with prices likely averaging around $2,710.

The incoming Biden administration is expected to be “environmentally focused and expected to rejoin the Paris Climate Accord,” he says. “Such a position should further increase demand for elements critical to meeting pollution-control objectives.” At the same time, palladium supplies have been in a deficit for a decade, and that’s not likely to change any time soon, he says.

Meanwhile, the global distribution of the Covid-19 vaccine may have an impact on palladium prices because “if more people start to resume some level of travel, the transportation mode most likely to be utilized will be by car,” says Ed Egilinsky, managing director and head of alternatives at Direxion. A “reopening of the global economy will be a key driver to that taking shape, and potentially lead to a significant spike in auto sales.”

Further lockdowns or additional strains of the virus, on the other hand, could lead to supply constraints in the palladium market, he says. That could come as a result of mining disruptions, but those constraints could also be offset by a decrease in auto demand.

Egilinsky says it’s feasible to see palladium prices hit new highs in 2021, especially if there’s a global recovery, auto demand picks up, and global emission standards are more regulated, but this “might have to coincide with some level of supply disruptions to have this narrative play out.”

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