Analysts Begin Worrying over Potential Palladium “Bubble”

Johannesburg, South Africa - May 23 2011: Underground Platinum Palladium Mining and Equipment

Palladium’s surge in price has become the hottest topic in the commodities markets with analysts and speculators alike expecting prices to continue to rise. However, even though significant fundamental factors are causing the price of the precious metal to rise, there is a growing contrarian voice among some analysts that are expecting a correction. With many jumping into the palladium market under the allure of the metal’s newfound popularity, some are wondering whether or not prices have entered the “bubble” territory and that a potential “pop” could occur.

Palladium’s rapid upward sprint in price has been fueled by more stringent environmental regulations, encouraging the production of electric vehicles and emission-friendly automobiles. In turn, this has increased the demand for catalytic converts, of which one of the main materials is palladium.

Overall, the precious metal has seen a 40 percent increase in price over the past four months as it has reached record highs as the predicted supply shortage increases. The commodity hit an earlier record of $1,558.80 an ounce, bridging the gap between the long-expected $1,600 price mark.

However, some analysts are suggesting that this massive price gap over its sister metal platinum, which is also used in catalytic converter production, is unsustainable. The two metals are potentially interchangeable but will require an adjustment period from corporations as they perform the necessary R&D, patenting, and implementation periods to switch to platinum-centric battery production. Until this is done, platinum-based catalytic converters won’t be able to match the performance of palladium-based converters. Despite this, there is a growing cadre of analysts that think

Palladium has entered into bubble territory,” said Ole Hansen, head of commodities strategy at Saxo Bank according to Bloomberg. “But as long we see no change in the outlook for tight supply or changing demand dynamics from consumers, the price could go higher.”

Other analysts expect that as the hype behind the metal dies of, more traditional driving factors such as economic data could see prices settle to more reasonable levels. Georgette Boele, coordinator of precious metals strategy at ABN Amro Bank, went to say that “if this would happen the sell-off could be very dramatic, as prices rose at an almost exponential level. So I would say fasten your seatbelts.”

Another reason that has propelled palladium prices come from a potential strike from a crucial mine in South Africa. The nation is one of the world’s two top producers of the metal, with Russia being the other. A strike would tighten up the already limited global palladium supply.

“End-users and traders will be increasingly concerned about supply. Importantly, palladium’s rise has less to do with short-term speculative factors, and instead a fundamental imbalance in the market’s supply-and-demand outlook,” added senior resource analyst Gavin Wendt at MineLife. Over 80 percent of the world’s supply comes from a byproduct of nickel mining in the two countries. As such, supply is closely correlated to extraction levels of other minerals, and drops in nickel production are strongly correlated with palladium output.

A number of palladium producers have gone on to reiterate the coming supply shortage the market will see. Russia’s Norilsk Nickel, the world’s largest single producer of the metal, reported better than expected earnings today as the company announced that global deficits in palladium would reach record levels. Anglo American Platinum, another miner that saw large profits from rising metal prices, expected that platinum, palladium, and rhodium would all see a significant deficit.

At the moment, the fundamental factors driving the surge in palladium price remain strong. While it’s expected that prices will breach the $1,600 per ounce level, it will be interesting to see whether or not the price will continue to soar after breaking that barrier. Some are expecting prices to increase to the $2,000 level. However, the higher the price of palladium surges, the stronger the voices concerning a potential bubble will become.