Palladium Prices Have Soared 23% So Far In 2022 —What Next?

The luck of palladium has certainly changed. The metal —which is part of the platinum group and used in catalytic converters in ICE vehicles, and in hybrid vehicles— has risen 23% so far this year, triggering an unusual investors’ appetite given the recent background. 

The turnaround comes after palladium depicted the worst performance of all raw materials in 2021 and because of its major role in the semiconductors shortage that hit automakers so hard —the situation caused a palladium collapse in the second half of last year.

So, is it time to talk about a palladium rally amid the Russia-Ukraine border crisis?

Rally Talk 

Despite missing out on last year's commodity rally, palladium could star in a major recovery given the prospect of a car industry comeback and the tensions on the Russia-Ukraine border. 

The increase is motivated by the risk of sanctions against the largest producer, Russia, “and the forecast recovery of the automobile market, which represents 85% of the demand,” according to Ben Laider, global markets strategist at eToro.

Precisely, almost 80% of the palladium extraction is controlled by the Asian giant and South Africa, so any movement concerning these regions has a great impact on prices.

Backwardation

The price of palladium has risen to its highest level in the last four months amid pressure from traders to secure supply amid rising Russia-Ukraine tensions —the former is the world's largest producer of palladium, well above the second.

In the over-the-counter market, the metal has rapidly entered backwardation —indicating lower availability— but the rebound may be shorter than expected. Precisely, one of the problems that affect the palladium market is its scarce liquidity, which has historically caused rapid movements in its price.

While stricter emission controls would mean more palladium loads in catalytic converters, palladium is needed only in hybrid vehicles, which currently represent 30% of the world market. 

“In the long term, the risk of substitution of pure electric vehicles could represent an excess of prices,” Laider estimates.

The Russian Affair

Although Russia has assured that it does not plan to invade Ukraine, Western countries are redoubling their diplomatic efforts to avoid a military confrontation.

The situation has been a lucky break for palladium, the worst-performing commodity over the past year. The impact of the semiconductors supply issues in car manufacturing affected the demand for this metal, whose price plummeted during the second half of 2021.

The issue gets more critical as Russian mines extract about 40% of the annual global production of palladium. In the event of a war with Ukraine, Western countries may impose sanctions on Russia's export of precious metals.

In fact, the U.S. and the European Union are considering additional sanctions on Russia's largest banks and are contemplating limiting the country’s ability to exchange rubles for dollars in the event of an invasion —which could affect exports.

“Squeezy”

Currently, palladium’s appreciation of 23% so far in 2022 represents a spot price of $2,415.50 per ounce.

According to Mining.com, “Hedge funds trading the New York palladium futures may also have been caught short by the recent move, with commitment for traders data as of Jan. 18 — the most recent available — showing short interest near the highest since 2018.” 

“Those looking to close their positions would be forced to buy metal at elevated prices,” the portal said.

Nicky Shiels, head of metals strategy at MKS PAMP SA, said: “I think it’s ‘squeezy’ and has the capability to run on geopolitical headlines and risk with no one willing to come in and provide the selling pressure to keep it capped. If it was really being squeezed, we would see a $1,000 rise in days given the illiquidity.”