Palladium price rally may be overdone

On Wednesday, the palladium price continued to defy weakness in the precious metal complex with Nymex contracts for March delivery up slightly to exchange hands for $736 an ounce.

While gold is down nearly $180 an ounce since Donald Trump's victory in the US presidential elections and silver and platinum have both dropped, palladium has gained more than 10% over the same period. Measured from its January low palladium is up more than 56%.

At the same time, higher prices could incentivise recycling activity which accounts for about 30% of total supply

In a new note Capital Economics warns that the rise in the palladium price may be overdone, despite predictions for a a sixth year of market deficits in 2017.

Commodities specialist at the London-based research firm Simona Gambarini says prices might be vulnerable to profit-taking in the short-term as the recent surge may have been prompted more by speculative activity on the derivatives markets than fundamentals.

What’s more, given abundant above-ground stocks, we expect the upside for prices over the next year to be fairly limited.

Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets, where diesel hardly features in the passenger vehicle segment. Roughly 75% of palladium demand is from the autocatalyst sector.

Capital Economics sees palladium rising to $800 an ounce by the end of next year as growth in the Chinese vehicle market slows from this year torrid pace with Beijing's small vehicle tax breaks expiring at the end of 2016.

Autocatalyst demand is seen slowing to 2% in 2017 from around 3.5% this year while mine supply is expected to rise following successful wage negotiations in top supplier South Africa.

"At the same time, higher prices could incentivise recycling activity which accounts for about 30% of total supply," says Gambarini.

Together Russia and South Africa control between 70% and 80% of the world’s supply of PGMs. Russia's state stockpiling organization called Gokhran sits on an disclosed amount of palladium built up during the Soviet era, which it releases onto the market from time to time.

The price of palladium reached 13-year highs above $900 an ounce in September 2014 on the back of a five-month long strike by South African miners, rising tensions between Russia and the West and a robust outlook for the US and Chinese auto markets.

The structure of supply has not altered in any substantial way since the 1970s when platinum and later palladium came to the fore as an important part of the world’s automobile industry.

Stillwater Mining (NYSE:SWC)  is the only platinum and palladium producer in the US and accounts for 6% of global palladium production and 2% of the world's platinum supply from its two Montana mines.

The stock ended Tuesday down nearly 2% but year to date the company's market value has spiked 74% affording it a capitalization of $1.8 billion on the New York Stock Exchange.