Thursday, September 6, 2007

Palladium demand trends

In my previous post, I have analysed the historical trend of Palladium supply by studying the world Palladium mining output from the beginning of the last century to the present time. In this post, I am focusing on the Palladium historical demand trends. A brief introduction on the procedure followed to analyse the time series: first I collected data from various sources (mainly USGS, Johnson Matthey, and various international Customs statistics), second the data from different sources were harmonised and the outliers eliminated. Third some missing data were extrapolated from correlated data such as stocks/inventories and import/export data and finally some missing data were interpolated. These kind of data-adjustment process was unavoidable since the oldest statistics (back in the thirties and forties) were poor compared to the most recent ones (Johnson Matthey annual PGM reports were very useful for most recent data).

As far as the nominal amount is concerned, it is clear from the above chart that the Palladium market is characterised by long period of excess supply followed by long periods of excess demand: it is rarely balanced and this fact alone explains the high level of volatility of the Palladium price.

The cyclicality of the excess demand/excess supply in the Palladium market is more evident when the data are charted as percentage (of the supply). The large and prolonged % surpluses of the thirties may be explained with the weakness of the economy during the great depression while the recent large % deficit of the nineties with the excess demand created by the autocalysts sector.

It is very interesting to study how the Palladium price reacts to this cyclicality of the demand-supply excesses in the Palladium market: are prices leading or lagging indicators of a unbalanced situation of demand and supply? Intuitively they should be a leading indicator, however it looks like the price of palladium has the tendency to raise after periods of shortage of Palladium rather than anticipate it as shown by the chart below.

Finally the chart below seems to confirm that the Palladium price looks like a lagging indicator of changes in demand.

Demand breakdown: the chart below shows Palladium demand by application over the last 25 years: the price spike of 2000 and 2001 forced consumer industries to look for substitution metals and to switch their demand to Platinum: particularly in the autocatalysts and electronics sectors.

I believe that the current Platinum-Palladium price spread very favourable for Palladium will reverse this trend pushing for more substitution from Platinum demand to Palladium demand especially in the autocatalysts sector: this predicted increase in substitution demand, the increasing Palladium investment demand and the additional demand coming into the market for new Palladium application in an environment of decreasing rate of growth of Palladium mining output should bode well for Palladium price outlook in the coming years.

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