PALL - Palladium: A Dead Investment In 2024?

2024-01-05 13:41:08 ET

Summary

• Palladium prices have fallen to 5-year lows due to expectations of surpluses and rising supply of electric vehicles.
• Rising demand for EVs and the availability of large palladium stocks are bearish factors for the metal.
• The supply of palladium is mostly dependent on Russia and South Africa, with South Africa's supply being at risk. Trading near multi-year lows could be a bullish factor.

Palladium, abrdn Physical Palladium Shares ETF ( PALL ), prices have had a tough time in the last several years. An industrial metal used in catalytic converters for automobiles is not too popular these days. There was quite a big surge in the prices of palladium in 2022 due to market fears of sanctions against Russia. But the precious metal has depreciated since then.

Recap of my previous article

Earlier in 2022, I wrote an article called " Palladium Has Given Up Its March Gains, But Is It Still A Good Investment?". In short, the precious metal has given up its price gains thanks to the fact there were no palladium import bans from Russia. The industrial demand is not particularly high because the demand for traditional cars is falling and so are palladium's uses in catalytic converters. However, palladium is not only used in the automobile industry. It is also required in fuel cells to generate power, in jewelry, dentistry, and electronic components. I also mentioned that major palladium suppliers are Russia and South Africa. In fact, they are accountable for 80% of the total palladium production. So, any major disruption in any of these countries can lead to a massive fall in palladium supplies. But in this article, I will focus more on the bullish and bearish factors the palladium market is currently facing.

Bearish factors

According to a Reuters article , palladium prices fell to 5-year lows below $1,000 an ounce in November 2023, due to expectations of surpluses thanks to rising supply of electric vehicles and automakers choosing cheaper platinum for their autocatalysts.

In addition to that, Russia's top producer Nornickel expects the market for palladium to record a surplus of 300,000 ounces in 2024 compared to a 200,000-ounce deficit in 2023 thanks to recycling that will outpace demand.

The rising demand for palladium was due to the car-making industry's attempt to cut carbon emissions from cars with internal combustion engines. Right now, however, EVs are actively replacing traditional cars.

According to Marex analyst Edward Meir, if EV sales rise as a share of total car sales from 14% in 2022 to more than 20% in 2024, then this will mean lower palladium demand. But in my opinion, the process of adopting EVs is a long-term one. One can be bearish long-term, but it does not mean there would be no price surge in the short-to-medium term. So, whether to invest in palladium depends on your planned investment horizon.

There are large palladium stocks at manufacturers. In other words, a large portion of palladium inventories held by producers have not been used. Moreover, according to Consultancy Metals Focus, above-ground palladium stocks totaled about 11.64 million ounces in 2023, compared with 12.35 million in 2022 and 12.89 million in 2021. All this means the supply of palladium is quite high.

My fellow Seeking Alpha contributor also wrote that the fact palladium is a byproduct of mining silver and copper is a bearish factor for palladium prices. In my view, it can be both a bullish and a bearish factor. That is because there could be very low production of both silver and copper, which would in turn translate into low palladium supplies. Likewise, high production levels of silver and copper could translate into an oversupply of palladium.

Another bearish factor or risk is that of an economic slowdown. Palladium is also an industrial metal. So, the demand for it depends on the health of the economy. If there is a recession, the demand for palladium will fall. This happened in 2008 and 2020.

Bullish factors

As I have mentioned before, the supply of palladium is mostly due to two countries, namely Russia and South Africa. This obviously means that the supply of this metal will fluctuate according to the production levels in these two countries. As written in the " bearish factors " section of this article, Russia's production of palladium has risen. However, not much has been said about South Africa. In fact, I would say that South Africa's supply is rather in danger. The economic and political situation in the country is quite complicated. For example, South Africa has been suffering from electricity blackouts for a while. The unemployment rate, GDP growth, and other macroeconomic indicators are rather concerning. So, any other major unfavorable event happening in South Africa can make the global palladium levels fall down significantly, thus making the commodity prices increase.

Another bullish factor is the fact that technically speaking, palladium is trading near multi-year lows.

It is near the levels seen in 2018 before the major rally that happened due to the tightening environmental standards and therefore rising demand for catalytic converters and palladium. Although the long-term trend may well be bearish, the very fact that this commodity is trading near multi-year lows could be a big plus for traders and medium-term investors.

Valuations

Right now the metal's prices are three times lower than they used to be in March 2022. As mentioned in the previous section, this could well be a plus. Another way of judging whether palladium is overvalued is by comparing it to platinum. The reason for this is that platinum can be used as an alternative to palladium when catalytic converters are produced.

Palladium vs. platinum prices

As can be seen from the diagram above, the palladium-to-platinum ratio is at a low. In other words, platinum is really expensive compared to palladium. So, it seems that the latter is rather overvalued.

Conclusion

In my view, the long-term trend is rather bearish due to the rising adoption of EVs. However, this will not happen overnight. Bears should also remember that if an asset hits multi-year lows, there is usually quite a high chance there will be a rebound. All is possible, of course. There might be a recession and the demand for all industrial metals will fall. However, any major supply outage happening either in Russia or in South Africa can lead to a price surge. But deciding on whether to invest in palladium depends on your investment horizon and your risk profile. My rating is Neutral.

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