At a time when gold and silver are tumbling the most in three decades, hedge funds are holding a near-record bullish bet on palladium as forecasters from Morgan Stanley to Credit Suisse Group AG predict years of shortages.
Demand will exceed output by 1.33 million ounces in 2013, more than North America produces in a year, Morgan Stanley says. Credit Suisse anticipates deficits through at least 2016, and researcher CPM Group says mines won’t catch up for a decade. Prices will average $800 an ounce in the first quarter, 11 percent more than now, and $850 in 2015, the median of as many as 12 analyst estimates compiled by Bloomberg show.
Speculators raised bets on higher prices eightfold in the past year and are holding a near-record amount in funds. That contrasts with a $60.6 billion slump in gold holdings this year and a $6.3 billion drop in silver as some investors lost faith in the metals as a store of value. They’re bullish on palladium because 67 percent of supply is used in autocatalysts, and IHS Inc. predicts record global car sales.
“The supply situation is potentially very bullish for palladium, so I am probably the most bullish on palladium amongst all commodities,” said John Stephenson, who helps oversee about C$2.7 billion ($2.6 billion) at First Asset Investment Management Inc. in Toronto. “Any time supply and demand are out of whack, we see prices swing.”
Palladium rose 2.6 percent to $722.50 in London this year, as gold declined 23 percent and silver 36 percent. Platinum, rhodium, iridium and ruthenium, typically found in the same ores as palladium, also retreated. The Standard & Poor’s GSCI Spot Index of 24 commodities lost 1.8 percent, and the MSCI All-Country World Index of equities gained 11 percent. The Bloomberg U.S. Treasury Bond Index fell 2.8 percent.
Autocatalyst manufacturers will use 7.16 million ounces of palladium next year, 89 percent more than a decade earlier, Morgan Stanley estimates. The canisters have honeycomb surfaces coated with metals that convert emissions including nitrogen oxides, blamed for acid rain, into less harmful substances. Tougher environmental laws mean 90 percent of new passenger vehicles now have catalytic converters.
Mining companies including Anglo American Platinum Ltd. (AMS) failed to keep pace with demand as strikes over pay disrupted pits across South Africa, the second-biggest producer. Total supply is contracting for the sixth time in nine years, Morgan Stanley says. Sales from Russian reserves, a state secret, will slump to 150,000 ounces in 2014, from as much as 1 million in 2010, according to Barclays Plc.
Hedge funds and other large speculators are holding a net 22,970 palladium futures, after increasing bets in 10 of the past 12 weeks, U.S. Commodity Futures Trading Commission data show. Wagers peaked at 25,742 contracts in April. Metal held in exchange-traded products rose 20 percent to 70.31 metric tons (2.26 million ounces) valued at $1.656 billion this year, according to data compiled by Bloomberg.
The scale of bullish wagers in futures also presents a risk because it becomes harder to find more buyers, Standard Bank Plc said in an Aug. 2 report. The bets are about double the average of the past four years, and aggregate open interest, or contracts outstanding, is within about 5 percent of the record reached in April, data compiled by Bloomberg show. Platinum is less crowded and can attract more bulls, Standard Bank’s analysts said.
China, the world’s biggest car market, is limiting auto purchases in some cities to combat pollution and congestion. The curbs may extend to another eight cities, tripling the total and reducing vehicle deliveries by 400,000 units, the China Association of Automobile Manufacturers said July 10. First-half passenger-vehicle sales increased 14 percent to 8.67 million units, association data show.
Rising costs are curbing demand for palladium in jewelry. The industry will use 305,000 ounces next year, compared with 775,000 ounces in 2009, Barclays estimates. Cheaper alternatives are also displacing the metal in the electrical and dental industries, and the market probably will avoid “an acute supply shortage” because there is enough stockpiled metal, Morgan Stanley’s analysts wrote in a June report.
Surging prices could also diminish demand for the metal in autocatalysts. Consumption in the devices fell 40 percent in 2002 after palladium reached a record $1,125 in 2001, according to Johnson Matthey Plc (JMAT), which has made one in three catalytic converters. The all-time high was preceded by shortages starting in 1997, data from the London-based company show.
Global production of cars and light trucks will rise 2.2 percent to a record 83.25 million this year and expand another 4.9 percent in 2014, according to IHS Automotive, a unit of Englewood, Colorado-based IHS. Automakers (SAARTOTL) will sell 15.4 million cars and light trucks in the U.S. this year, the most since 2007, according to the average of 18 analyst estimates compiled by Bloomberg.
Mine production contracted in three of the past five years, according to Credit Suisse. The bank anticipates 6.59 million ounces of supply from pits by 2016, or 333,000 ounces less than in 2007. South Africa and Russia account for 79 percent of mine output, increasing the potential for disruptions from strikes and safety-related closures.
Mining companies are going deeper to find ore, with Northam Platinum Ltd. (NHM)’s Zondereinde mine in South Africa reaching down as much 1.3 miles (2.1 kilometers). Strikes caused almost 15 billion rand ($1.52 billion) in lost output across the South African mining industry in 2012, according to the National Treasury.
Shares of Anglo American Platinum dropped 21 percent to 354.50 rand in Johannesburg trading this year and will decline to 342.11 rand in 12 months, according to the average of 17 analyst estimates compiled by Bloomberg. Palladium accounted for 17 percent of sales last year. The Johannesburg-based company said in May that it would idle three shafts and cut 6,000 jobs to restore profitability.
OAO GMK Norilsk Nickel (MNOD), the biggest producer, declined 22 percent in Moscow trading this year. Analysts are predicting the shares will rebound to 6,080 rubles in 12 months, according to the average of seven estimates. Palladium generated 14 percent of the Moscow-based company’s sales last year, according to data compiled by Bloomberg.
“The fundamental expectations are bullish,” said Tom Hainlin, the national investment strategist for Ascent Private Capital Management in Minneapolis, which oversaw about $112 billion of assets at the end of June. “The context of a commodity based on global consumer demand and shortfall in supply tells me that the metal will remain in favor.”
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