CPM Group Precious Metals Advisory

Palladium Price Outlook
Palladium prices moved mostly sideways between $1,825 and $2,150 during July. Palladium prices have been moving largely sideways for several months. Palladium prices have been supported by supply side issues on the one hand while concerns regarding weak fabrication demand fundamentals on the other hand have been weighing on palladium prices. Palladium prices look vulnerable to the downside, with initial support for prices
at $1,840.

Concerns regarding lost supply out of Russia have died down significantly from levels earlier this year, even as the war between Russia and Ukraine continues and the tensions between the West and Russia also continue. This is because palladium supplies out of Russia have made
their way into global markets since the war started earlier this year.

While there has not been any direct stoppage of palladium out of Russia, the supply crunch in the European energy market is a constant reminder that palladium supply disruptions out of Russia should not be fully ruled out. This has helped to support palladium prices. Additionally, Norilsk Nickel, the palladium mine producer in Russia, stated in July that its operations have been negatively affected by sanctions that have caused tightness in supplies it needs for mining and smelting.

Additionally, there was an actual loss in palladium supply due to the flood at Sibanye’s Stillwater mine in the United States, which is helping to further provide support to palladium prices.

The fabrication demand side of the palladium market has been weak, however. Demand for passenger vehicles in most major auto markets has not been particularly strong, and the prospects for demand growth do not seem particularly promising at this time either. In China, where vehicle sales have picked up since June, post covid related lockdowns, a lot of the gains came from smaller vehicles or battery electric vehicles, due to various fiscal incentives attached to these vehicles. These smaller or battery powered vehicles are not supportive of palladium
fabrication demand.

Fabrication Demand
U.S. auto sales during the first half of 2022 stood at 6.8 million vehicles, down 18% from the same period in 2021. Slowing economic growth, high inflation, rising interest rates, and a shortage of chips are all factors expected to continue hurting U.S. auto demand during the
second half of the year.

While the total volume of sales has declined in the U.S. one factor that is supportive of palladium fabrication demand is the ongoing increase in market share of light
duty trucks versus cars. At the end of the second quarter the market share of these larger vehicles stood at 79%, up from 78% at the end of 2021. The rising price of gasoline is likely to act as a headwind to demand for these vehicles, but nonetheless the market share for larger
vehicles continue to grow in the U.S. market.

While Chinese auto sales had a rough start to his year, with covid related shutdowns choking off demand, there has been a strong rebound in June sales, following the reopening and the introduction of fiscal incentives to buy small cars or battery electric vehicles (BEVs). Sales
driven by these fiscal incentives are not likely to be very positive for palladium demand, however, because they favor the sales of smaller and or electric vehicles.

Chinese passenger vehicle sales jumped to 2.2 million in June, up 41.6% from the same period in 2021. Sales during the first six months of 2022 now stand at 10.3 million vehicles, up 3.5% over the corresponding period in 2021.

Investment Demand
Net palladium positions held by institutional investors on the Nymex have been net short for a year. The consistent net short positions held by these investors suggests that they remain nervous regarding the future prospects of palladium.

At the end of July institutional investors collectively were net short 340,800 ounces, down from 382,000 ounces at the end of June. The reduction in net short positions during July can be completely attributed to a decline in gross short positions, with gross long positions declining.
The spike up in palladium prices on 7 and 8 July induced some of the shorts to liquidate. Further liquidation appeared to occur over the following five trading days as prices subsided.

Gross long positions had dropped to 67,600 ounces on 19 July, which was the lowest level that these positions had reached since May 2003. Gross longs recovered some at the end of July, rising to 72,400 ounces by 26 July. While up from the previous week, these levels still are very low by historic standards and highlight investor concerns about the future of this market.”