PGM Outlook – Platinum to catch up with palladium

by: Georgette Boele

In this publication: Palladium prices outperformed the dollar and platinum prices in 2018, but price volatility was high. We expect price volatility in palladium prices to continue and the upside to be limited. We expect higher prices for platinum in our forecast horizon.

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Introduction

So far this year, palladium prices have been by far the strongest precious metal in 2018. However, the price rally has been more volatile and less amazing compared to 2017. Prices have outperformed the US dollar by around 13% year-to-date. Meanwhile platinum, gold and silver prices have declined by 5% to 15%.  Platinum prices have declined by around 15%. So the platinum/palladium ratio has declined to the lowest level since 2001. We had expected lower platinum prices because of lower Chinese jewellery demand, expectations that diesel cars will lose market share and higher US Treasury yields and the US dollar. We also had expected weakness in palladium prices but this did not materialise.

Why have palladium prices strongly outperformed platinum prices? For a start, fears that US sanctions to Russia would hit palladium exports. Russia is one of the main producers/exporters of palladium. Moreover, the decline of market share of diesel cars in favour of petrol cars has weighed on platinum prices and this has supported palladium prices (used in petrol cars). Moreover, expectations of higher demand from China because of China’s new auto emissions standards.  In this report we focus on our outlook for 2019.

Positive outlook for platinum…

For 2019 we expect platinum prices to rise. This is because a weaker US dollar and lower US Treasury yields will be supportive for platinum prices. Moreover, we expect Chinese jewellery demand to bottom out. In addition, we expect that platinum prices will rise above the 200-day moving average (now around USD 860 per ounce). This will probably result in a change in sentiment towards a more constructive one. However, it is likely that the share of diesel cars will continue to decline but this is well anticipated by investors. Moreover, investors may already have cut back short positions – they are now moderate net-long platinum – but there is ample room to build up further net-longs. Taken all together, we expect higher platinum prices in 2019 and 2020.

… and fasten your seatbelts for palladium

The case for palladium prices looks strong. With the increase of the middle class in China, demand for cars in China will likely continue to increase, even though annual growth of Chinese car sales has slowed this year. Autocatalyst demand for palladium will rise further because of stricter emission standards and a slight increase in Chinese car sales. Dental and industrial demand will probably hold up well. However, investors are already positioned for this bull case and we doubt if there is more upside in prices. The reason is as follow. Prices have increased sharply while the increase in net-long investor positioning would suggest a less spectacular price increase. Moreover, palladium is even rising when equity markets are not. This is unusual combination. This means that the price increase is probably driven by the prospect of lower supply instead of the prospect of higher demand. In other words, the market is more worried about the supply side than on the demand side. As soon as these supply fears ease, palladium prices could move sharply lower. We think that this will be the case in 2019. So “fasten your seatbelts” would be the best strategy for palladium. We hold the view that all the positive news is already reflected in the price and prices have overshot too much. In 2019 we expect some normalisation and palladium prices to come back to earth, meaning a move back below USD 1,000 per ounce. We also think that the longer the price difference between platinum and palladium remains in place, technological changes will probably support the substitution from palladium to platinum. In short, we don’t share the bullish palladium view of the market.