Palladium Price May Skyrocket In 2021 Due To Deficit

Summary

• The largest palladium ETF may start selling inventories to mitigate the palladium deficit in 2021.
• Palladium may be in deficit in 2021 due to Nornickel's halt of production and increasing demand.
• This may result in a palladium price shock.

The only fund that keeps purely physical palladium ingots on its balance sheet is the Aberdeen Standard Physical Palladium Shares ETF (NYSEARCA:PALL). It is an exchange-traded fund established and managed by the Aberdeen Standard Investments ETFs Sponsor LLC. The main goal of the Fund is to reflect palladium prices; exactly for this, it holds physical ingots of the metal in its assets. PALL is the only public palladium fund in the United States. The chart demonstrates the dynamics of the number of ounces of metal held by the Fund. The Fund’s actions also illustrate the dramatic lack of palladium supply on the market that has forced it to sell its reserves. It can be seen that during the years of the deficit, there was an outflow of physical palladium from the Fund’s assets. Since 2011, the Fund has shortened its reserves from almost 12 million troy ounces to 1.6 million troy ounces.

On an industrial scale, palladium is produced as a by-product in the processing of copper and nickel ores. But despite the increasing demand, the palladium market is represented only by several major players, and that means it depends on them dramatically. Automotive, industrial, and electric power sectors are in the greatest demand for palladium.

The first chart shows the division of palladium demand by different sectors. According to 2020 data, the demand for autocatalysts has increased to 80%. The greatest demand for palladium is in the automotive industry. Palladium is essential for the production of catalysts for cars that reduce toxic exhaust emissions. This demand is largely determined by the introduction of strict rules for cars with gasoline engines in Europe and China. The second chart demonstrates a drop in car production in 2020, which reduced palladium consumption by 14%. According to estimates, the sector should recover as early as in 2021, which should again increase the demand for the metal.

In recent years, there has been a trend in developed countries towards the gradual rejection of gasoline-powered cars in favor of hybrid ones. Hybrid autos also use autocatalysts just like conventional ones. But, due to the specifics of starting their engine, even more palladium is required to make catalysts for hybrid cars. According to analysts, the hybrid car market will grow rapidly, and with it the demand for palladium.

The first chart shows the balance of the palladium market in recent years. The shortage occurred mainly due to the strict requirements in China and European countries aimed to fight the growing level of pollution. Such measures have led to the situation where each automobile requires 30% more palladium than before. And China is the major car manufacturer in the world. To cover the resulting shortage in the market, the funds began to sell their reserves. According to analysts’ forecasts, the balance of supply and demand in the palladium market should have been formed already in 2021.

As can be understood, the palladium market is very fragile. Any large-scale changes will immediately be reflected in palladium prices.

In the middle of February, heavy flooding occurred at the two main Nornickel (OTCPK:NILSY) mines (Taimyrsky and Oktyabrsky). This incident has already had a strong impact on palladium prices; however, the situation is far from recovering. Nornickel has already announced that, in 2021, the Company’s palladium production will be reduced by 20%, which means that the total global supply of the metal will fall by 8%. Judging by the fact that the Company has already postponed the recovery period several times, the situation when the mines will be restored throughout 2021 should be considered. In this case, the palladium market may shrink by 20% in a year. Below is an infographic of the current situation at the Taimyrsky and Oktyabrsky mines. The circles outline the most flooded areas.

Pressure on palladium may also be exerted by the rapid recovery of the automotive industry, which, as already mentioned, is the major consumer of the precious metal. The acceleration of vaccination, the lifting of restrictions, as well as the beginning of the holiday season - all these factors will have a positive impact on the production of cars, and therefore on palladium.

As a result, the situation at Nornickel’s mines, together with the growing demand from the automotive industry, will lead to a shortage increase in the palladium market. In order to somehow cover this deficit, funds, in particular PALL, will have to sell their stocks again, which, without any doubt, will affect prices.