Palladium prices are expected to lag behind other precious metals in the near future, according to analysts at UBS. The market has been volatile, with prices fluctuating above $1,000 per ounce. This volatility is due to elevated short positions, which are expected to continue in the short term.
Despite a tightening palladium market driven by specific factors, the long-term outlook remains pessimistic. The demand for palladium, primarily used in autocatalysts, has been sustained by a decline in electric vehicle sales this year. This sector accounts for over 90% of palladium consumption, and the current market dynamics have allowed for a temporary increase in demand.
Additionally, anticipated supply cuts from a U.S. palladium mine next year are expected to further tighten the market, prompting UBS to revise their price forecasts upward by $100 per ounce. However, these short-term factors do not alleviate concerns regarding the long-term viability of palladium.
The shift from internal combustion engines to battery electric vehicles poses a significant threat to palladium demand. As the automotive industry increasingly embraces electrification, the reliance on palladium in autocatalysts is expected to diminish, leading to an oversupply of the metal. Although global car electrification rates have stalled, consumer preferences are shifting towards hybrid vehicles, which still utilize autocatalysts and, consequently, palladium. This trend may provide temporary support for palladium prices, but the long-term implications are concerning.
Supply dynamics are also playing a crucial role in shaping the palladium market. The fourth-largest palladium producer, which holds a 14% market share, is planning to restructure its U.S. operations due to unfavorable pricing conditions. This restructuring is anticipated to result in a reduction of platinum group metal production, particularly palladium, with an expected cut of around 150,000 ounces. This reduction represents approximately 2.3% of the total mine supply for 2023, further complicating the market landscape.
While UBS acknowledges the short-term tightening of the palladium market, they caution that the metal is likely to underperform relative to other precious metals. The anticipated increase in scrap supply from old car autocatalysts next year, coupled with a continuing trend of substitution in new vehicle autocatalysts favoring platinum over palladium, adds to the challenges facing palladium.
In summary, the palladium market is currently experiencing a complex interplay of factors that are influencing both short-term price movements and long-term demand dynamics. While immediate supply constraints may provide some support for prices, the overarching trend towards electrification and the shift in consumer preferences signal a challenging road ahead for palladium. Investors and market participants will need to navigate these dynamics carefully as they assess the future of this precious metal in an evolving automotive landscape.