Palladium market performance next year

Oil prices moved modestly higher in European session as an EU/ECB/IMF bailout for Ireland may help ease risks of contagion to peripheral countries. Currently trading at 82.82, the front-month contract for WTI crude oil rose after recording 2 consecutive weekly losses. Fuel prices also climbed as weakness in USD drove demand for commodities. Precious metals traded within narrow ranges with a positive tone. Both silver and palladium gained more than +1%, outperforming slow crawls of gold and platinum.

The program to fund Ireland would be financed from the European financial stabilization mechanism (EFSM) and the European financial stability facility (EFSF). It would also possibly be supplemented by bilateral loans to be negotiated by EU Member States with the UK and Sweden standing ready to consider a bilateral loan. The IMF also said it 'stands ready to join this effort, including through a multi-year loan'.

Market confidence has been boosted today but some investors, including us, worried that sovereign crisis in peripheral European economies will not be resolved after the rescue plan. The next country in focus is Portugal. Although the EU denied that Portugal may need to tap external funds as does not have the same size of problems in the banking sector as Ireland. However, the problem in Portugal is slow growth and high deficits. More importantly, if Portugal is unable to regain market confidence, it will eventually have the same fate and Ireland and Greece.

Societe Generale said palladium, gold and silver will extend their rallies in 2011 and precious metals will outperform agricultural products. The investment bank forecasts gold price will rise to 1500 to 1600 in 2011 while silver and palladium will rise 19% and 21% respectively.

We are also bullish on precious metals and believe palladium will be the best performer in the complex. As we mentioned in the weekly report, Johnson Matthey estimates palladium demand will jump +12.26% y/y in 2010, following contraction of around -8% over the past 2 years. Although supply will increase for the first time in 3 years, surplus will only be around 45K oz, the small level since 2000. Potential supply shortage supply in Russia may result to significant palladium deficit in 2011. We find ourselves more optimistic on palladium's outlook than Johnson Matthey, especially on Chinese demand. In the interim report, Johnson Matthey said that 'the demand outlook for palladium is so strongly weighted towards Chinese economic and industrial growth that any softening of that growth could reduce demand, moving the market closer to balance'. While we agree that acceleration in China's tightening measures to curb inflation and asset bubbles will slow demand for palladium, rise in living standards will increase domestic demand for vehicles. Moreover, new emission regulations will also stimulate uses of palladium as autocatalysts.


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