10 November 2023

Palladium: How low can it go?

On Thursday this week, the price of palladium passed through $1,000/oz for the first time since September 2018. Substitution for platinum in autocatalysts and a less-than-rosy outlook for 2024 autocatalyst demand has contributed to palladium’s ongoing 18-month bear market.

The palladium price has been in decline since March 2022 after reaching a record intraday high of $3,420/oz following the invasion of Ukraine and worries that Russian supply would be cut. Sanctions and official embargos on Russian palladium never materialised, and the geopolitical risk premium subsided. As of Friday, the palladium price is trading below $1,000/oz on the spot market, meanwhile platinum is also testing year-to-date lows at $850/oz. The PGM basket price has fallen further as a result, and more of the PGM producers’ production will feel the pressure on margins and profitability. Against a global recessionary backdrop, near-term support may be technical rather than fundamental, as the price is now oversold.

Beresford Clarke

Managing Director: Technical and Research

SFA's views:

1. Automotive purchasing isn’t firing on all cylinders

• • OEMs built up precautionary inventories following Russia’s invasion of Ukraine and the power supply problems in South Africa. As a result of lower perceived risks some OEMs are running down their inventories to more normal levels and have had little need to enter the spot market to fulfil PGM procurement needs.

  • Automotive demand is forecast to make up 80% of total palladium demand in 2023, equal to 8.19 moz. SFA forecasts that palladium autocatalyst demand will fall next year to below 8 moz.

  • Market share of tri-metal gasoline autocatalysts is increasing, thus reducing average palladium loadings in new light vehicle sales. Despite sluggish growth in the last quarter, the market share of BEVs is still gaining ground, to the detriment of palladium demand, and recession risk is still elevated in the US and Europe.

Figure 1: Cash costs per equivalent Pd oz, CY2023E

Source: SFA (Oxford), Bloomberg. Note: TCC = total cash costs, SIB = stay in business costs

Figure 2: Regional PGM basket prices

Source: SFA (Oxford), Bloomberg

2. Fourth-quartile PGM mines are now loss making at spot prices

• • The dramatic decline of Pd and Rh prices have led to the South African PGM basket price falling by >40% Palladium-rich operations in N. America are most at risk of closure in ’24-’25. The top quartile of producing shafts is already underwater. (Fig. 1).

  • Production cuts as a result of the sharp reduction in prices (Fig. 2) will take time to materialise but would deepen platinum deficits faster and reduce surpluses in palladium and rhodium from ’25 onwards.

3. History suggests further downside

• • Based on previous palladium price spikes, the palladium price may have further to Bear markets beginning in 2001 and 2008 saw declines of 87% and 72% respectively. This equates to $392/oz (Fig. 3) and $843/oz as the low point.

  • The palladium price is oversold and there is a potential support level at $900/oz.

  • Speculative positions in palladium futures are very net short, leaving the metal open to a short covering rally.

Figure 3: Palladium price (indexed on peak price)

Source: SFA (Oxford), Bloomberg

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