How to invest in palladium in 2022

 Palladium prices rose to a new all-time high during the first three months of 2022, but then struggled against the headwinds that appeared in the second quarter, thereby reducing the metal's gains in the first half to 5.2%.

The 2021 oversupply kept palladium prices below $ 2,000 per ounce at the start of the year as the market tried to absorb the excess material. Despite a previously expected deficit, weak automotive demand pushed the market towards a surplus for the first time in a decade.

Shortly thereafter, Russia's invasion of Ukraine weighed on already fragile supply chains, also raising issues related to palladium production. In 2021, Russia produced 74,000 kilograms of palladium and the country accounts for 37% of the primary supply of palladium. Uncertainty sent palladium to an all-time intraday high of $ 3,189 on March 9. At the end of March, market fears dissipated and values ​​returned to $ 2,270.

The second quarter of 2022 proved to be much more challenging for palladium: Q1 earnings were eroded by factors such as four-decade high inflation, rising energy costs and supply chain problems. At the end of the first quarter, platinum group metal (PGM) prices hovered around $ 1,935.

Expected decline in demand

The automotive catalyst segment is the main end user of palladium and much of the metal's performance is linked to the demand for vehicles with internal combustion engines. Like many other markets, the automotive sector was in the midst of a slow post-COVID-19 recovery as inflation began to rise to levels not seen since the 1980s.

Faced with declining disposable income, persistent semiconductor shortages, supply chain challenges and high gas prices, Metals Focus expects a slight increase in automotive demand for palladium, but overall demand should result in slight decline.

Palladium prices are still high

Even with a drop of 14.67% in the second quarter, palladium prices are still relatively high when compared to the historical average.

"Palladium prices have risen very sharply for about five years and continue to rise," said Jeffrey Christian, managing partner of CPM Group, during a presentation in late July. “They showed some weakness; the average rose 9% last year, but it was already very high ”.

The continuous rise in the price of the metal has prompted car manufacturers to substitute it for platinum. This aspect is highlighted by Metals Focus, in whose dossier we read that “on a global level, the metal continues to face the headwinds deriving from the shortage of semiconductors, particularly in the first half of the year, and from the substitution with platinum”.

The metals consultancy also notes that the substitution will take place in the industrial demand segment of the palladium market. “The high price of palladium continues to incentivize substitution in sectors where alternatives are available, namely electronics and medical,” he explains.

The Russian effect on palladium

In addition to the demand problems that the replacement presents, the supply side of the PGM market is also in a precarious position due to the important role of Russian production.

“Concerns about supply disruptions and the benefits from safe-haven inflows into the precious metals sector in general have pushed (PGM) prices up,” reads Metals Focus's overview of PGMs. "However, the second-order effect of the crisis could turn out to be negative for PGMs, as new supply chain challenges, rising energy prices and damage to consumer sentiment could weigh on vehicle manufacturing." .

“Security of supply concerns, particularly for palladium, arose following Russia's invasion of Ukraine and given Russia's importance for global supplies of mined palladium and, to a much lesser extent, platinum, ”he commented. "This could increase the efforts to replace platinum with palladium and change the procurement and inventory management strategies of a wide range of market players."

Palladium Price Predictions

While palladium replacement is increasing, there are factors that could add tail winds to the price of palladium for the rest of the year.

In particular, the strength of investment demand is likely to continue as palladium prices maintain their higher values. According to CPM Group's Savant, investors continued to absorb surface stocks of the metal in 2021, hoping that a recovery in auto demand would push prices even higher.

The vice president of research also explained that the decline in demand in the automotive sector could be offset by a recovery in sales of large vehicles in the United States, as well as the need for higher loads to meet stricter environmental regulations, which "would support the demand for palladium ".

As for supply, in addition to the challenges of Russian production, the market could experience disruptions in South Africa, the main producer of platinum and palladium. In total, supply from mines is expected to contract by 5% in 2022.

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