Palladium prices reach record highs as China fuels demand

Palladium prices are shattering record highs, and investors are betting that tight supplies mean the bull run is just getting started.

The metal, used in pollutioncontrol devices in cars, has jumped almost 9 per cent this year in New York, the best performance among major metals. Demand is roaring thanks to China, which is on a mission to reduce smog emissions. Tougher pollution standards mean carmakers are using more of the commodity in catalytic converters.

Global palladium production is falling short of the robust demand, and market forecasters including Citigroup Inc. are projecting further price gains ahead. Hedge funds are also wagering on an extended rally, holding the biggest positive bet on the metal since early March.

“The market has a very positive fundamental outlook,” said Maxwell Gold, director of investment strategy at Aberdeen Standard Investments, which oversees US$730 billion ($1062b) . “We’ve been dealing with supply deficits going on eight years, and that’s expected to continue. Supply’s certainly been an issue on the mining front as well as the drawdown of existing stockpiles.”

Palladium is a thinly traded market. Much like sister metal platinum, its production is extremely concentrated, with Russia and South Africa collectively producing about three quarters of the world’s mined supplies.

Almost 70 per cent of palladium demand comes from the auto industry, according to researcher CPM Group. Car sales have stayed relatively strong in most places, helping to insulate prices from the handwringing over global growth that’s dragged down many industrial commodities.

Supplies are so constrained that users have turned to exchange-trade products to borrow the material they need. This has pushed palladium holdings in ETFs to the lowest since 2009 as manufacturers seek supplies above ground, said Gold.

Hedge funds are adding to their bullish outlook. In the week ended November 13, money managers increased their net-long position, the difference between bets on a price increase and wagers on a decline, for a second straight week to 12,837 futures and options, according to data from the Commodity Futures and Trading Commission.

Palladium futures in New York jumped 5.2 per cent in the week which ended on Friday to US$1154.60 an ounce.