The tide may be turning for unwanted PGM

PALLADIUM is heading south again after two bursts this month took the metal’s price firmly through $1,000 per ounce. At last count it was trading at $979.02/oz, a price decline of 4.5% during Tuesday.

“Something is going on and we not a 100% sure on drivers,” said one market source of the recent rally. “Probably a combination of less Russian supply, short covering and uptick in economic confidence outlook.”

Certainly light auto buying played a role in early March, according to Stone X analyst Rhona O’Connell. “It set off a lot of short covering,” she said.

Managed money positions end-February were at a record net short of 1.3 million ounces. Quite suddenly, short covering totalling 60,000 oz triggered a sharp $200/oz gain in the palladium price.

Despite price weakness in the last seven days the metal is 8% stronger in March. Platinum has also benefited, up 1.8% this month.

“Looking at the different commodities, it would seem to be across all commodities that we are seeing a price jump – oil, gold, silver, platinum as well as palladium. I would agree that a short squeeze is highly likely, exacerbating palladium’s rally relative to other commodities,” said Wilma Swarts, director of PGM Research at Metals Focus. “As the price edges up, so we would see more short covering, which pushes price up even higher.”

The direction of Federal Reserve on interest rates is also having a major bearing on metals, palladium especially. A lower interest rate regime may trigger more new car purchases. According to Fed Reserve chair Jerome Powell, inflation is not yet under control but markets are starting to factor in a sooner rather than later outlook.

“Inherently this should be positive for the economy for example vehicle sales should lift as the costs of leases and loans come down,” said Swarts. “Given the fundamental deficits, and expectations that metal inventories should now be at more normalised levels, it is our view that prices should be higher than the current levels.”

For now, PGM prices are behaving as Anglo American Platinum CEO Craig Miller said they would in December and again in February – with significant volatility. “It’s so uncertain,” he told Miningmx at the firm’s full year results last month.

Palladium is set for a supply deficit this year but the expectation is it will move into a significant surplus thereafter. This assumption may be incorrect, however.

“Futures postioning is incredibly short, the shortest it’s ever been,” said Ed Sterck, head of research for the World Platinum Investment Council earlier this month. “That is based on the perceived wisdom palladium is entering a sustained market surplus, possibly from next year. But if you dig into the weeds, the surplus for palladium is not the result of demand tailing off which is what a lot of people assume.”

The expectation is for a significant increase in recycling supply of over one million ounces. Were that not to come through, and there is significant risk on recycling supply, the outlook for palladium is different, he said.

Firstly, traders who are short the metal will need to unwind those positions in double-quick time, itself a price positive factor. Then there are the potential cuts in mined supply. “If it all comes through in a market so heavily shorted, that could translate into a pretty substantial short covering rally,” said Sterck.