Palladium Outlook 2021: Supply Constraints Tailwind to Higher Value

Palladium prices climbed 18 percent over the course of the 2020. Read on to find out about the 2021 palladium outlook.

Click here to read the previous palladium outlook.

2020 saw palladium add 18 percent to its value over the 12 month period, however that wasn’t the whole story. Effects of the pandemic weighed heavily on precious metals early on, with palladium prices displaying volatility following the initial lockdowns imposed in March.

The platinum group metal (PGM) had trended to an all-time high in February before sinking to a five month low 30 days later.

Although the COVID-19 facilitated drop was short-lived, the market and commodity swan dive managed to shave 41 percent from the metal’s price, taking it from US$2,614 to US$1,522.

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As gold and silver quickly rebounded,  platinum and palladium also followed suit. The latter two benefiting from a resurgence in safe haven investment allure, something the former two are aided by broadly.

2020 palladium price chart

2020 palladium price performance. Chart via Kitco. 

Heightened interest from the investment segment, did not combat supply disruptions.

“COVID-19 had an impact on both metals’ (platinum and palladium) prices, the impact was greater on platinum than on palladium in large part due to the disruption to South African mine supply,” explained CPM Group’s Rohit Savant.

Palladium outlook 2021: Sector performance tied to automotive demand

Palladium prices remained well off the year-to-date high from February due to a decline in demand from the automotive sector.

Roughly 80 percent of annual demand comes from auto manufacturing, industrial demand accounts for 18 percent and the jewelry sector uses the remaining 2 percent.

According to a SP Global report, automotive sales around the world are expected to have fallen 20 percent for 2020. The declines are forecasted to last an additional two years with output sitting at least 6 percent lower than 2019.

“We continue to believe that the Chinese market has the potential to resume moderate long-term growth, and project it will be the only region to recover to 2019 volumes by the end of 2022,” reads the overview.

“In Europe and North America, sales showed signs of stabilizing in July and August, but we don’t expect these markets to fully recover their steep declines within the next two years.”

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With palladium’s primary end use segment being significantly impacted, prices for the metal were also affected.

“Platinum and palladium prices took a significant hit at the start of the pandemic, after growing robustly in the previous year on the back of tight supply and strong demand prospects” explained Steven Burke of FocusEconomics.

“The drop in prices in late February and early March was predominantly driven by a stark fall in demand from the automotive sector. As lockdown measures weighed on the global economic outlook, vehicle demand took a massive hit.”

As demand was contracting, a reduction in supply out of the top PGM  producing country, South Africa, worked to offset the automotive decline.

“Restrictions on South Africa’s mining sector to control the spread of the virus dragged heavily on supply, which, coupled with safe-haven demand, helped prices to recover quickly in Q2,” said Burke. “In H2 2020, the ongoing rise in prices was mainly driven by recovering global economic activity—particularly out of China as car sales in the country were healthy.”

Palladium outlook 2021: Supply deficit supports higher prices

Palladium prices rose 18.6 percent for 2020, however the metal climbed more than 55 percent from its March low (US$1,522) to a high in November (US$2,370). 42 percent of that recovery came just seven days following the mid-March dip.

“Palladium jumped really strong out of that March lows, it was one of the first ones to break out,” said Ralph Aldis of US Global Investors (NASDAQ:GROW). “I was kind of surprised, I didn’t expect it to come out as strong, but it did.”

The portfolio manager noted that all precious metals performed well in 2020, a trend he calls the broadening of the sector, referring to a growing interest from investors. In fact, palladium, along with silver and platinum all outperformed the yellow metal, from their lowest points in March to subsequent highs.

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2020 wasn’t the first year that palladium made strong gains. In 2019, the catalyst metal added 46 percent to its value.

“Palladium has been in tight supply,” said Aldis, who went on to explain that production woes in Russia, the top producing palladium country, could add to that supply narrowness in the future.

“You have the issue in Russia with permafrost, at the Norilsk (MCX:GMKN) facility, they may have some reduced output in the future, potentially,” said Aldis. “If something happens with their infrastructure, and they’re having to be rebuilt or shore up in some way that could slow production.”

With output in Russia potentially being impacted down the road, and the disruption we saw in 2020 out of South Africa, Aldis sees newly discovered deposits as a possible catalyst. In particular Chalice Gold Mines (ASX:CHN) Julimar project in Australia, which he calls one of the biggest we saw in 2020.

“They have pulled out some fantastic holes, platinum palladium, nickel and copper; they’ve made a major discovery,” calling the project a game changer, Aldis noted that the perceived safeness of the jurisdiction also added to its appeal.

“So Australia, I think could be disruptive to the South Africans and the Russians in terms of tough competition.”

Canada could also play a role in diversifying the palladium supply. In 2019, sector major Impala (OTCQX:IMPUY,JSE:IMP) acquired the Lac des Iles mine in Northern Ontario, an area that is getting attention from the PGM sector.

According to Aldis, Impala will need to ensure it has feedstock to last into the decade, making an adjacent deposit owned by junior Clean Air Metals (TSXV:AIR) especially interesting.

“In the future (Lac des Iles), it’s going to need feedstock to replace its depleting ores, and Clean Air Metals is the closest deposit to that operation that would likely become the next feedstock,” he added.

Palladium outlook 2021: What investors can expect

Since January palladium has held above US$2,200 an ounce, making it the most valuable of the four precious metals. Prices spiked during the first week of the year, when values climbed to US$2,394, the highest since February 2020.

january 2021 palladium price chart

 2021 palladium price performance. Chart via Kitco. 

“Palladium prices are forecasted to rise during 2021 on an annual average basis, however, the gains in palladium prices are expected to be relatively lackluster compared to other metals in the complex,” said Savant.

The vice president of research at CPM Group cited several potential catalysts that could benefit or hinder the momentum of the metal.

“Much of palladium’s 2021 price forecast is pegged on a recovery in palladium fabrication demand,” he said. “The availability of vaccines and the large monetary and fiscal stimulus injected into the global economy is expected to support this expectation of growth in fabrication demand.”

Growth in demand is anticipated for the second half of the year, with prices rising in expectation of the heightened calls.

In terms of what price point we can expect to see for the metal, FocusEconomics offered some insight.

“Panelists see palladium prices falling slightly from their current level but remaining extremely elevated by historical standards, averaging US$2,261 per troy ounce in Q4 2021,” said Burke.

Prices are likely to be slightly depressed as South African production returns to pre-pandemic levels.

“That said, the ongoing recovery in global economic activity should support demand for vehicles—particularly for hybrids—and cap the overall fall in prices,” added Burke.

“A potentially faster-than-anticipated rollout of a vaccine is an upside risk, while the possible substitution of palladium for platinum in catalytic converters, given the elevated price disparity between the metals, is a downside risk.”

As vaccines are rolled out across Europe and North America, Africa is estimated to receive shipments of inoculations in late summer, a factor that could result in further lockdowns leading to mining sector disruptions.

US Global Investors Aldis, pointed out that South Africa controls 90 percent of the resource base in the PGM space.

“This (vaccine delivery) is going to impact probably every sector out there because the roll out of the vaccine is going to be very problematic in countries where their healthcare infrastructure suffered from a lack of investment to some extent.”

Official numbers on  just how impactful South African lockdowns have been on palladium supply are still being tallied according to Savant, although a significant reduction is estimated.

Anglo American Platinum (Amplats) (LSE:AAL,OTC Pink:AGPPF) a South Africa focused PGM major had to drastically reduce its guidance in 2020. Not only did the government impose lockdowns weigh on output, so did a fire at its smelter plant.

“They (Amplats) curtailed guidance down to about 2.5 million ounces from 3.1 million – 3.3 million, that’s almost 600,000 ounces, less production,” said Aldis. “It should tighten the market”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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