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IPMI and Industry News: Palladium Market News

PALL: Palladium Market To Remain In Deficit In 2019 Despite The Contraction In Global Auto Output No

Saturday, November 30, 2019   (0 Comments)
Posted by: Matt Watson
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PALL: Palladium Market To Remain In Deficit In 2019 Despite The Contraction In Global Auto Output

: Seeking Alpha

Article Link:  https://seekingalpha.com/article/4308865-pall-palladium-market-remain-deficit-2019-despite-contraction-global-auto-output

 

Summary

PALL has come under intense downward pressure since the start of November.

We argue that the recent weakness offers a buying opportunity, because the fundamental picture of the palladium market remains tight despite downturn in global automotive market.

Even in a bearish scenario, in which global auto production would contract by 7.5%, the palladium market would still experience another deficit this year.

We expect PALL to hit $210 per share in the first quarter of 2020, a 30% upside from tis current level.

 

Investment case

While PALL has come under intense downward pressure since the start of November, we believe that the recent weakness offers a buying opportunity, because the fundamental picture of the palladium market remains tight despite the weakening of auto trends. The tightness of the refined palladium market is reflected in the backwardated structure of the forward curve of Nymex palladium.

Despite the notable contraction in global automobile production (principally driven by China), the refined palladium market is still set to post another deficit this year, which should therefore drive palladium prices higher until the supply/demand imbalance is corrected.

In this context, we believe that PALL will rally stronger in the months ahead, setting our Q1-20 target at $220 per share.


Source: Trading View, Orchid Research

About PALL

For investors seeking exposure to the fluctuations of palladium prices, the Aberdeen Standard Physical Palladium Shares ETF (PALL thereafter) is an interesting investment vehicle because it seeks to track spot palladium prices by physically holding palladium bars, which are located in JPM vaults in London and Zurich. The vaults are inspected twice a year, including once randomly.

The fund summary is as follows:

  • PALL seeks to reflect the performance of the price of physical palladium, less the Trust’s expenses. 
  • Its expense ratio is 0.60%. In other words, a long position in PALL of $10,000 held over 12 months would cost the investor $60.
  • Liquidity conditions are poorer than that for platinum. PALL shows an average daily volume of $3 million and an average spread (over the past two months) of 0.33%.

Contraction in automotive production

Total automotive production, including heavy-duty vehicles, contracted by 6% year on year (YoY thereafter) in the first three quarters of 2019, which was primarily driven by a downturn in the Chinese automotive market.

Source: Nornickel, Refinitiv

The Chinese auto market - the world’s largest passenger vehicle market - continued to struggle in October, with domestic automotive production down 1.7% YoY, according to the China Association of Automobile Manufacturers (CAAM).

Even though the CAAM revised its growth forecast for passenger car sales to a decline of 5% for 2019, this could still prove a touch optimistic considering the persisting weak buying sentiment in the country.

The weakness in the Chinese automotive market is partly due to the US-China trade dispute, which has affected extremely negatively buying sentiment in the country. Although a partial trade deal is likely, potential Chinese buyers view the US-China frictions as structural and therefore are reluctant to buy new cars in the foreseeable future.

In addition, the recent policy measures aiming at supporting the Chinese automotive market (including the reform of VAT) have failed to boost confidence.

Palladium consumption revised lower

Given the downturn in the global automotive market, Nornickel has recently revised lower its growth forecast for palladium consumption from the automotive industry to +3.5% from +5.8% previously in May.

Automotive demand for palladium was revised lower because the previous forecast (back in May) implied a growth of 1.1% in global auto production. The November forecast assumes a contraction of 2% in global auto production this year.

Source: Nornickel

However, we caution that the ongoing downturn in global automotive market could suggest that the November forecast is still a bit too optimistic. Should Nornickel’s bear-case materialize, automotive demand for palladium would contract by 0.2 moz or 2.4% YoY in 2019.

But even in such a scenario, the palladium market would experience a deficit this year.

Looking at global demand for palladium (including demand from chemicals, electronics, jewelry), Nornickel forecasts an increase of 0.1 moz or 1% in palladium demand this year, which should put the deficit at slightly more than 500,000 oz.

Deficit reflected in the shape of the forward curve of Nymex palladium

The collection of data we track to gauge the tightness of the palladium market and our independent fundamental analysis also suggest that the palladium market will be in deficit this year.

The fundamental tightness of the market is clearly visible in the backwardated structure of the forward curve of Nymex palladium. As a reminder, the forward curve of Nymex palladium has been in backwardation since May 2017, due to an increasingly low physical metal availability. Here is a visual of the current forward curve of Nymex palladium:

 

Source: Denver

Closing thoughts

Despite the downturn in the global automotive market, especially in China, the world’s largest market, we form the view that the refined palladium market should experience another deficit in 2019. The tightness in the palladium market is clearly reflected in the backwardation in palladium's forward spreads. We therefore argue that the palladium spot price should continue to move higher in the coming months. As a result, we view the recent weakness in PALL as a buying opportunity.

Our Q1-20 target for PALL is at $210 per share, a 30% appreciation from its current level.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.


 

 

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