Today I dedicated my post to Palladium’s 11-year macro analysis.
Chart: Aibek Burabayev; Data courtesy: Johnson Matthey; LBMA
Indeed, Palladium is in high demand, but it wasn’t so ten years ago when demand figures in million ounces (Moz) were only in the single digits. The market was heavily oversupplied in 2004 and the price was laughably cheap by today's standards. Its sister metal, Platinum, had a more well-balanced structure with equal supply and demand. See my previous post on Platinum.
In 2005, the indecent cheapness of Palladium, especially compared to sky-high Platinum, had spurred margin hunting demand from both jewelers, with 1.5 Moz total demand or 1.5 times higher compared to 2004, and industrial buyers, with decent 28% growth at 2.8 Moz. It was the largest demand year in a decade from jewelry sources. My congratulations to those who bought gifts for your ladies since the price had tripled since then!
Jewelry demand was stable after a peak in 2005 around 1 Moz for three consecutive years (2006-2008). Then it started to gradually decline year-over-year and had almost run dry in the record total demand year of 2014 (at the smallest level of 0.3 Moz or a paltry 3% of total demand). I guess the reason is the dramatic fall of Platinum's price. Therefore, jewelers rushed to it adding to the record demand in Platinum. Below is the chart of the Platinum/Palladium ratio which acts as evidence.
Chart courtesy of TradingView.com
The ratio had fallen from the peak in 2009 above 5.5oz down to a 12-year record low below the 2oz level recently. It is interesting that the ratio has been rising to the maximum amid the growing Palladium price. It means that the Platinum price soared even faster those years.
Like in Platinum, both auto-catalyst and industrial demand are the main demand drivers of Palladium. Automobile industry demand can be characterized as solid (50-70% of total demand), stable and growing (at higher margin levels for the last 4 years) despite the quadrupled metal’s price in 2014. On the break of crisis, demand in auto-catalysts had fallen only 11% in 2 years(2007-2009), but then made a new record and overshot previous levels.
Industrial demand is also a significant source of demand with an average share of 28% of total demand. The key industrial demand driver is so-called electrical demand (50% of industrial demand) and it is the main reason why the share of industrial demand is falling from 31% to 20% of total demand, as electrical demand had peaked in 2007 at 1.6 Moz and now stands only at the 1 Moz level. Such a huge decline had been caused by falling demand in chip capacitors, the main electrical application of Palladium. Both dental and chemical demands are very stable, almost equal in volume and make up the rest of industrial demand.
And for "dessert" is investment demand. To understand how investors’ attitude to Palladium greatly mis-correlates with the other 3 key metals, Gold, Silver and Platinum, you should refresh you memory with my previous posts.
It is amazing that all of the main metals, except Palladium, showed negative dynamics of investment demand. Palladium investment demand, on the contrary, had a 500% growth from 2004, reaching a record 1 Moz level in 2014, amid steady price which was above $600 during the last 5 years. In only one year of the last decade was the net investment demand negative at the -0.6 Moz level, as price had declined from $791 in 2010 to $636 in 2011.
I think that investors had put high stakes on Palladium due to a sharp growth of the deficit (from a surplus of 2 Moz in 2004 to a tremendous deficit of 1.8 Moz in 2014). Also worsening the scenario was the intensified tensions in the major supply regions of West Russia and South Africa.
The global trend of strict emission control adds pressure on supply, as Palladium is a cheaper substitute for Platinum, and investors have gone long to benefit from this perspective.
I will update you on the long-term technical outlook in one of my furture articles.
Lucky trades,
Aibek Burabayev
