Equity markets have had a mixed start so far on Friday, while ongoing worries over the Covid-19 pandemic and its effects on global economic growth overshadow risk sentiment.
The latest commitment of traders data shows net length among Nymex funds declined by 964 contracts to 291 contracts in the week to March 24, while long-liquidation outweighed an element of short-covering.
Net exchange-traded fund (ETF) holdings total 487,942 oz, based on the funds we track, down from 682,389 oz at the end of January. Given the relatively low level of exposure, the risk of further considerable disinvestment has been significantly reduced.
The persistent backwardation in the forward curve reflects the structural tightness in the underlying fundamentals. Consultancy Johnson Matthey projects the global palladium market to remain in a sizable structural deficit in 2020, adding to the 1.1-million oz deficit in 2019, while rising emission standards increase autocatalyst loadings, outstripping metal supplies despite record levels of recycling from scrapped autocatalysts.
These projections do not reflect the impact of the Covid-19 pandemic, however. LMC Automotive now projects global light vehicle sales to contract by nearly 14 million vehicles or 15% in 2020, and potentially by more than 20% to 69 million vehicles if the pandemic persists into the second half of the year.
There could also be some substitution away from palladium following German chemical group BASF's development of a tri-metal catalyst that will enable partial substitution of palladium with platinum in light-duty gasoline vehicles without compromising emissions standards.
Concurrently supply-side disruptions have intensified. South Africa's mine sectors have suspended operations for 21 days until April 16, with South Africa accounting for 38% of global palladium supply. This will add to the impact following the suspension of operations at Anglo American Platinum’s (Amplats’) Waterval facilities in Rustenburg, South Africa, following an explosion at the plant on February 10.
Palladium's price premium to platinum stands at $1,501 per oz, down significantly from a recent peak of $1,980 per oz, but the fact palladium continues to command a strong premium reflects the diverging fundamentals between the two metals.
Price indecision has featured recently - as implied by the Doji candlesticks. Prices have weakened, reflecting the increased pressure facing the global automotive market, however, a small flag formation appears to be forming, which could suggest a continuation of upside price sentiment in the short term while the complex continues to benefit from safe-haven demand.
All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.