Palladium futures have rallied to their highest price in more than four months, and are likely to continue their rise whether Russia, the world’s largest producer of the metal, invades Ukraine or not, analysts say.
On Thursday, the most-active March palladium contract
PAH22,
PA00,
settled at $2,366.50 an ounce, the highest since Sept. 3, FactSet data show.
Russia mining is “crucial” to palladium supply, with the country’s mine production accounting for roughly 40% of global mine production, based on data going back to 2010, said Nikos Kavalis, managing director at independent precious-metals consultancy Metals Focus.
Russia has amassed around 100,000 troops on the Ukraine border, raising expectations that it plans a renewed invasion of its neighbor, following Russia annexed Crimea in 2014.
On Thursday, a Russian spokesman said President Vladimir Putin would take time to considering proposals delivered Wednesday by the U.S. and the North Atlantic Treaty Organization, according to a report from The Wall Street Journal.
Should Russia invade Ukraine, the mining sector may be a target for sanctions, said Peter Grant, vice president and senior metals strategist at Zaner Metals and Tornado Bullion Solutions. An invasion may lift palladium to $2,700 an ounce, he said. However, “investors should be cautious as palladium is a thinly-traded, and therefore, volatile market.”
Palladium futures are poised to score a weekly gain of nearly 13%, and already trade almost 24% higher year to date.
How high prices for the metal go will depend on what types of sanctions on Russia are implemented. “If we have a situation where there are financial sanctions that restrict Russian entities’ access to European and U.S. banks and payments systems and vice versa, it will no doubt create frictions, delays and bottlenecks and increase the cost of buying palladium from Russia producers,” said Metal Focus’s Kavalis.
Ultimately, however, the metal would “still be able to come out of the country” and prices would receive a “limited boost” in such a scenario, which would eventually be offset by profit-taking by investors riding the current rally, he said.
On the other hand, “blanket restrictions” that make it impossible for European and North American firms to buy Russian palladium, which seem unlikely, would have “exceptionally strong price upside” for palladium, he said. If that were to happen, there would also be a “very real risk” to vehicle production volumes that would be very detrimental to the automotive industry in the West, given palladium’s use in automobile parts, so it’s unlikely that something this dramatic would unfold, he said.
Still, if any sanctions are announced, Kavalis expects a short-term price spike.
Meanwhile, Chris Blasi, president of Neptune Global, has said that an all-out conflict with Russia would “exasperate an already critical supply issue” in palladium, potentially driving palladium prices “well north of $4,000 per ounce.”
But even if there isn’t an all-out conflict between Russia and Ukraine, Blasi believes prices would still climb — just “more slowly and with its usual high volatility.”
Palladium has been in a supply deficit for several years, he said, which has contributed to its general price rise over the past six years. Last year was the exception, with futures prices for the metal down about 22%, which he attributed to a drop in global production of goods, including auto production, as a result of COVID-19.
He also pointed to infrastructure problems in South Africa, which is another key palladium producer. The nation’s infrastructure, including power supplies, is deteriorating rapidly and negatively impacting the mining industry and its output, said Blasi.
Meanwhile, the belief that the move to electric cars would cause a supply glut in palladium for the foreseeable future is a “gross miscalculation.”
“As things stand now, and for some time to come, the bigger market is for lower-priced vehicles with internal combustion engines versus high-priced electric cars,” Blasi said. “This is true not only in the U.S., but even more so in the developing nations.”
