UBS analysts have expressed concerns about the future performance of palladium, suggesting that it may not perform as well as other precious metals.
The recent volatility in palladium prices, which have been fluctuating above $1,000 an ounce, is attributed to high short positions in the market. This volatility is expected to continue in the near term. Despite these short-term fluctuations, UBS has increased its price forecast for palladium by $100 per ounce, citing tightening market conditions.
Several factors are contributing to the current dynamics in the palladium market. The decline in sales of electric vehicles (EVs) this year has inadvertently increased demand for palladium, particularly in the autocatalyst sector, which accounts for over 90% of palladium consumption. Additionally, a U.S. palladium mine is expected to reduce its supply next year, further tightening the market. UBS has adopted a more neutral outlook for palladium, even though it warns of the metal's potential underperformance compared to other precious metals.
The supply dynamics of palladium are also undergoing significant changes. The fourth-largest palladium producer, with a 14% market share, plans to restructure its U.S. operations due to unfavorable pricing conditions. This restructuring is expected to result in a reduction of approximately 150,000 ounces of palladium production, which is about 2.3% of the total mine supply for 2023. These supply constraints could lead to higher prices in the short term, although the long-term outlook remains uncertain.
The anticipated increase in scrap supply from old autocatalysts next year adds complexity to the palladium market. As more vehicles are retired and replaced, the recycling of palladium from these components is expected to increase. This, coupled with a growing preference for platinum over palladium in new autocatalysts, suggests that the market may face an oversupply of palladium in the coming years. Analysts are closely monitoring these developments as they could significantly impact the palladium market and its role in the automotive industry.
The shift towards electric vehicles in the automotive industry is a key factor influencing the palladium market. While the global electrification rates of cars have stagnated, there is still a consumer preference for hybrid vehicles, which use automotive catalysts and, therefore, palladium. However, as the industry continues to evolve, the long-term demand for palladium is expected to decline, potentially leading to an oversupply situation.
Market sentiment regarding palladium is mixed, with short-term factors creating a sense of urgency among investors. The volatility in prices, driven by high short positions, has led to speculation about potential price movements. However, UBS's warning about palladium's underperformance compared to other precious metals highlights the risks involved in investing in this market.
As the automotive industry adapts to changing consumer preferences and regulatory pressures, the implications for palladium are significant. The interplay between supply dynamics, market restructuring, and the shift towards electric vehicles will shape the future of palladium. The outlook for palladium remains uncertain, with both opportunities and challenges on the horizon.