Palladium: Is it indeed going for a bubble burst?

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HotForex Market Review
HotForex Market Review

Palladium, Daily & Weekly

Spot palladium tumble by more than 17% from record highs at $1,609.85 at the end of March, with the main catalyst of this drift possibly being the closing of positions as the end the month and the end of quarter (i.e. end of the contract) came. The plummet was the biggest drop seen the past 2 years, raising concerns regarding a possible bubble burst of $1,116 rally since 2016. This stands to a 234% rise. .

As Commerzbank stated: “In our opinion, a correction of the palladium price was long overdue. “It is not yet possible to say whether yesterday’s plunge was the bursting of a bubble; for this to be the case, the price would need to fall even more sharply or further.”

Indeed, technically speaking, we cannot claim for a bubble burst, as the precious metal retraced less than 23.6% of 3-year gains and less than 38.2% of 2018 gains. Meanwhile, holds above the 20-week SMA, which provides a strong Support area for the asset the past three quarters.

Theoretically speaking however, Palladium is strongly positive correlated with the car industry as it finds the 80% of its demand from gasoline autocars. The source though of Palladium’s performance the last decade was and still is the global supply deficit, fired by the car industry demand. By considering only 2017 supply, the deficit reached 801K ounces.

Despite the latest decline on Palladium’s prices, it is yet unlikely the demand for palladium to change significantly the next few years. This could be explained by the tighter emission standards. Hence despite the overall economic slowdown, the auto sales slowdown in China (due to tax cuts) and US, the higher recycling volume, and the high price of palladium, car-makers must meet emission standards. Hence they are quite “forced” to use palladium, as it is the metal used in catalyst converters to reduce emissions from gasoline engines.

In Europe on the other hand, the swing from diesel engines has hit European producers and as a consequence platinum price as well, which was the most preferable metal for reducing emissions in diesel engines. This poised the risks stated above, for Palladium’s price, as diesel engines are “undesirable”.

The expensive palladium and unwelcome platinum will push eventually manufacturers to turn to potential PGM-free engines (PGM stands for Platinum Group Metals). However this would take time. A potential approach for manufacturer could be to substitute palladium for platinum on engines other than diesel ones. However this is a scenario has not be accomplished yet and seems inevitable for now.

So far, the legislation and the taxation for diesel engines, but also the general tighter emission standards, boost the substitution of diesel engines into alternative engines, such as electic, hybric and petrol which all require the use of more palladium. Gasoline vehicles expected to maintain a majority market share to 2025 and to increase in absolute numbers including gasoline hybrids. These factors could keep palladium demand rising, unscathed from the economic slowdown and the higher recycling volume.

Meanwhile, in China, the world’s largest consumer, as Morgan Stanley reported new legislation will be applied  from 2020 which will require 30% more  PGMs on each vehicle. This is another factor that is likely to keep demand high.

As Norilsk Nickel Group, one of the largest palladium mining company stated: “The demand for palladium is growing.” “Per unit PGM consumption in hybrid cars is higher than in traditional vehicles with the same ICE volume; accordingly, we expect palladium consumption to increase by 3 mln oz by 2025.

Additionally, according to research from BASF, the world’s leading supplier of catalysts, demand for palladium in China is expected to grow from 2.332 million ounces to 3.429 million ounces by 2022.

As the supply deficit is more in favour of palladium than platinum or any other PGM metal, the palladium price is not expected to extend the sell off extremely. Currently, palladium is accelerating again lower, after the small rebound from last week’s low, at 1,331.90. Having met on March 21, the Resistance area at the edge of the upper weekly Bollinger Bands pattern at 1609.85, the sharp pullback seems to be a correction on this long term rally.

Looking at the technical indicators, the longterm outlook keep engrossing by a stronglpositive sentiment. The medium term however and more precisely the daily indicators, turn to a decreasing momentum, signalling a possible extension of the latest drift. The MACD lines turn negative, with lower Bollinger Bands and RSI pointing downwards.

A closing breakout below 1-week Support at 1,331.9, could push palladium to December 2018 and January 2019 levels. The next Support is at 1,275, which is the mid of 38.2%-50.0% Fibonacci retracement of the August 2018-March 2019 upleg. Further losses would move open the way at a significant area for the longterm outlook , as it this area break could confirm a bubble burst and could open the way to 1-year lows. This area is placed between 200-day EMA and the 50% fib level, i.e. 1,220-1,235 area.

On the flipside, Resistance comes between the latest peak and the 50-day EMA, at 1,440-1,465.

 

 

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