Sectornomics: Materials

Palladium bulls are getting ready for a run


Move over, gold. Palladium is ready to shine.

The precious metal, used mostly to make catalytic converters that clean up emissions from combustion engines in cars, has seen a 7-percent jump in futures prices year-to-date. And analysts see further upside for the commodity, thanks to squeezed supply and growing automobile demand.

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Trading around $782 per ounce (click here for the latest price), palladium is mainly produced in South Africa and Russia. Ongoing strikes by miners in South Africa and unresolved tension surrounding sanctions on Russia could drive up the prices by triggering supply constraints.

"If nothing happens (with Russia), we think the market will likely get up to around $880 for a high for the year," INTL FC Stone analyst Edward Meir said. This would still be close to highs of 2011, but lower than the record level set in 2001 when prices went up past $1,000.

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But if the situation with Russia intensifies or if there is a supply disruption, the price could reach $950 or more, he said..

Rising auto demand is also likely to fuel the rally.

"We're seeing real robust increases in auto sales in major markets, especially gasoline car sales in the U.S. and China," said Mu Li, senior commodity analyst at CPM Group. Palladium-made catalytic converters are used in gasoline cars, which dominate the U.S. and Chinese auto markets.

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Palladium is a critical industrial component—demand is strong, and there is room for prices to move higher.

In fact, demand for catalytic converters will keep growing, as China, the largest automotive market in the world, continues to tackle its air-quality problems.

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"I don't know social demand for lower air quality," said Rick Rule, founder of Sprott Global Resource Investments. "The demand would be for higher air quality."

But palladium isn't the only standout among the metals. Traders are also bullish on platinum, a precious metal also in high demand for industrial use.

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Platinum is used to make catalytic converters for diesel cars that dominate the more lukewarm European auto market. South Africa produces 70 percent of the metal, and there is far less exposure to Russia.

Platinum futures are up nearly 5 percent year-to-date, and were recently trading at $1,441 an ounce (click here for the latest price).

Analysts project a sharp price increase in the prices of both platinum and palladium metals over the next four years and a more stagnant movement for gold, silver and copper, according to financial-data firm FactSet.

Of the two, Li says investors are more bullish on palladium, which is used more widely and is likely to enjoy a boost from the strong growth of car markets in China and U.S.